If you are looking for more funds for your business, you may have come across the term merchant funding or merchant financing. This might be just what you need to pay for your expenses, pursue new investments, and position your business for future growth.
What Is Merchant Funding?
Merchant funding or merchant financing is basically financing for merchants. It is a general term that refers to any business financing for any merchant with a “credit card processing system”. Often, merchant financing can be referenced as merchant cash advances. This funding type takes repayment automatically via your credit card processing system.
How Does It Work?
The way it works is that a “merchant financing lender” will set you up with an arrangement for intercepting the income that your business gets through your credit card transactions. It’s through that arrangement that they will collect a “daily percentage” of those transactions as a type of repayment. This will continue until the merchant financing plus interest has been completely paid off.
With this payment structure, when your business is doing well, you will pay more towards your total financing. On the contrary, when your sales are sluggish, you will be paying less towards your financing. In addition, when you have zero transactions or on holidays, you will not need to pay anything.
Since there is no way of determining how long it will take to completely pay off your merchant financing, it will carry “factor rates” which are in the form of decimal values that show how much your merchant financing will cost in the end.
The Benefits Of Merchant Funding
So what makes merchant funding a viable solution for your business? Take a look at the top three reasons below:
- It’s Easy To Qualify: The great advantage of merchant financing is that most merchant financing lenders don’t look at your business or your personal credit history. Since funds will be automatically withdrawn from your credit processing system, lenders only care about you having a high volume of credit card transactions.
- Auto Repayment: Another plus of merchant financing is that the repayment framework means that you don’t have to worry about missing a payment. The repayment framework is such that your credit card revenue will be “intercepted” by your lender before it hits your account. There is no worry about any rejected payment fees or late fees. Furthermore, the repayment framework is a daily percentage that lets you pay based on the performance of your business. If your business is doing well, you pay more, if not, you pay less.
- Cost Of Capital Is Low: Merchant financing is a great short-term type of financing that greatly benefits all small businesses. This is due to its low cost of capital. Since you are making payments daily, the odds are higher that you will pay the loan off completely. Since lenders are fully aware of this, they don’t charge you a lot of interest. Your loan is likely to reach maturity within a year’s time frame, if not sooner.
However, when you look at long-term financing, because your payments will be less frequent, as in monthly, it will take longer for the loan to reach maturity. Another downside to this is that they will accrue more interest and will cost more in the long term.
When it comes to merchant financing, with the daily payments you are making to pay off your loan quickly, you will pay less for the financing.
Is Merchant Funding Right For You?
If this sounds like something you would like to dive into, your next step is to seek a trustworthy and reputable merchant financing provider. Make sure that before you move forward that you have thoroughly analyzed that this would be a beneficial decision for your business.