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How Does a Merchant Cash Advance Work?

In recent years, merchant cash advance providers have become a popular option for small business owners in need of quick access to working capital. A merchant cash advance is not a loan; it is in fact a sale. The provider offers a business a lump sum in exchange for a share of future sales. Businesses that have strong credit-card sales – retail, restaurant and service companies, for example – but do not qualify for loans from a bank can secure the business funding they need.

There are many reasons why a bank turns a small business away. Some business owners suffer from a bad credit history. Some have no collateral to offer. The only catch for businesses considering a cash advance with an alternative lender is the different between how much the cash advance costs compared to the interest on a loan or credit line.

Merchant cash advance companies are very clear that the advances are not a loan. The deal is a “purchase and sale of future income”. What does this mean? These advances are not bound by laws that regulate lenders and limit interest rates. Instead, they take a percentage out of the merchant’s daily credit card sales for the repayment of the advance and their premium – usually in fewer than 12 months. The great advantage is that, during slower months, the merchant pays less; that is, the payment each month varies with the merchant’s cash flow.

According to Mark Lorimer, chief marketing officer of Kennesaw (Ga.)-based AdvanceMe, “When a business takes a loan, they have a firm date that it has to be repaid; they have fixed payments that have to be made on a schedule. In a merchant cash advance, there is no due date, there is no fixed payment.”

Merchant cash advance providers typically guarantee fast funding, a hassle-free application process, a high approval rate and an easy collections process. With First American Merchant, for example, funds can be found in the merchant’s account in as little as 72 hours from receiving approval. Unlike with a bank, the approval is based on a merchant’s business performance, rather than personal credit, financials and time in business. In addition, the payments are automatically withheld from the merchant’s credit card transactions, and the monthly payments are fixed. The payments are also based on the percentage of the business’ daily sales.

If you are in need of quick working capital for your business, consider what a merchant cash advance with FAM can offer you. The application process is fast, simple and hassle-free. To learn more, contact First American Merchant today.