September 27, 2020

An Insight Into Merchant Cash Advance Schemes

Entrepreneurs operating small and medium-size businesses need to maintain steady cash flow at all times. Otherwise, they will find it difficult to pay their taxes, suppliers, employees, and manage inventory levels. Moreover, they will not get enough money to implement their business expansion plans. However, many of them often go through phases where they cannot generate enough sales and revenue. This is when they face a cash crunch and have to approach banks. The financiers usually offer them a wide range of schemes to overcome the cashflow problems. These could include commercial loans, invoice financing, overdraft facilities, and lines of credit. One popular scheme they generally opt for is merchant cash advances.

What do bankers consider when approving merchant cash advance schemes?

The merchant cash advance is a financial scheme for entrepreneurs to avail against their customers’ credit card sales. Bankers offering this mode of finance to them ensure all their borrowers meet their stringent eligibility criteria. They expect entrepreneurs to fulfill these conditions before approving the necessary funds. Bankers look into the following aspects before lending the money to them under this scheme:

  • The creditworthiness of the entrepreneurs.
  • The quantum of credit card sales the entrepreneurs can generate in a specific period.
  • How often do they deposit the proceeds of these sales into their business bank accounts?
  • The ability of the entrepreneurs to repay the funds they borrow promptly.
  • The bankers will even ask for and scrutinize their previous tax returns, and
  • The risks the bankers are likely to incur in case they default on their repayments.

After considering the above factors, the bankers usually approve the entrepreneurs’ merchant cash advance applications. In doing so, they even fix a suitable interest rate and holdback margin before releasing the necessary funds.

Advantages over traditional commercial loans

The advantages of this mode of finance over traditional commercial loans which banks offer are as follows:

  • There is no need for entrepreneurs to provide suitable collateral
  • They do not have to go through a lengthy procedure to get their schemes approved
  • Entrepreneurs can get instant access to funds they require within 24 hours
  • The amount of money they can borrow depends on the quantum of credit card sales they generate
  • The approval rates of this mode of finance are higher than commercial loans
  • There is no monthly minimum repayment amount under this financial scheme unlike commercial loans
  • There are no late charges as bankers automatically deduct the repayments from credit card sale proceeds.

Applying for any merchant cash advance scheme is a convenient way for entrepreneurs to get over their cashflow problems. In this mode of finance, they do not have to provide suitable collateral or undergo a lengthy approval process. The sum of money the entrepreneurs can borrow depends on the credit card sales they generate. Moreover, they can get access to the necessary funds within 24 hours, unlike most commercial loans. They do even worry about fulfilling minimum repayment requirements. The bankers deduct the amount from their credit card sale proceeds. As a result, they do not incur any interest charges.