The world of merchant finance has been pretty much upended by the financial meltdown and associated restriction of commercial credit both worldwide and in the U.S. Merchant finance can mean different things to different businesses, but the one common theme is that it is usually money lent for business purposes, normally those of a retail or business to consumer merchant over a short period of time ranging from 6-12 months. It may also be a line of credit that can be accessed, paid down, and then reused. Below are several of the most common types of merchant finance loans.
1.) Working Capital Loan– This is a loan that is expressly used to for a business to meet ongoing needs such as paying vendors, buying equipment or even making payroll until receivables come in. Loans such as these normally help a business “even out” the financial peaks and valleys between when a job is completed, and when a job is paid by the client. As most businesses work off a net 30 or net 60 arrangement, they may have to pay costs upfront, and then wait for the money to come in. Other retail businesses, such as restaurants, need to pay purveyors and vendors on a weekly basis, but use these loans to keep funds available for payment dates that do not occur on high cash flow days.
2.) Long Term Financing– This type of business loan is usually used to finance bigger and longer term purchases such as buying a building to house the business, or financing large purchases, such as expensive equipment or large capital intensive projects. Funding times and loan duration are typically much longer for this type of loan due to extensive underwriting and appraisals that may be involved. Common sources include commercial mortgages, secured equipment loans and SBA-backed loans from a commercial bank.
3.) Merchant Cash Advance– This is typically a short term “advance” given by a credit card processor or merchant cash advance company. These loans have the flexibility to work with a variety of credit situations and can normally fund within a couple of weeks. The downside is that most cash advance lenders will require a business to switch credit card processors, pay high upfront fees and charge rates as high 50% or more. Fortunately new, lower cost options are on the market that combine the flexibility of these loans with dramatically lower rates and no upfront fees or requirements to switch credit card processors.
If you are in need of merchant finance, it pays to do your detailed homework so you do not put your business interests in long term jeopardy. At the same time, it is important to remember that there are still options available for those who take the time to research their needs and their options.