Alternative funding to merchant loans

Alternative funding to merchant loans

Running a business can be difficult, yet rewarding at the same time. However, when it comes to progressing a business or venture, this is typically a sign that the business is moving in the right direction; towards growth and progression. As part of this process, the vast majority of businesses will need to seek funding of some kind in order to fund their growth.

For example, a product-focused business may need the extra funding to buy more stock to sell. A technology manufacturer may need to invest in the latest piece of tech in their industry and a service based business may well need to invest in new staff to grow their business or cope with a particularly busy time of the year. No matter the reason and no matter the precise nature of the business in question, there are several routes which they may pursue to secure the funding needed.

Options for business funding include traditional business loans, investment from business angels or investors, merchant loans and other routes of funding. However, there are also alternatives to these routes which include ‘merchant cash advance alternative’ loans (source: CubeFunder) and mezzanine finance in cases where there is a degree of security available (in the form of some type of business asset).

Merchant Loans and Cash Advance Alternatives

Merchant loans in the traditional sense are loans that are well-suited to businesses such as shops and retailers with a consistent flow of revenue through their credit and debit card terminals. The merchant lender will require the borrowing business to switch their credit provider to another of the lender’s choice. Thereafter, the loan will be lent with repayments being a percentage of the revenue from credit and debit cards.

For many businesses, this is an ideal way to borrow and repay a loan. This is because they are able to borrow the money they need for their business and repayments are barely felt, as the appropriate amount of money to make the loan repayments goes directly to the lender via the card terminals. Over time the loan amount plus interest is paid off via this route.

However, these loans can of course only apply to businesses where there are significant amounts of turnover passing through their card terminals. There are numerous business types that are simply not eligible for these loans as they are cash or non-card payment businesses. This often includes businesses such as florists, mechanics and hairdressers who simply do not take card payments for a variety of reasons.

What is the alternative?

Businesses that do not qualify for merchant loans include manufacturers and suppliers as well as service providers, all of which don’t necessarily have a customer facing element to their business and therefore have little need for card payments.

For example, a manufacturer of medical devices may need the funding to invest in the latest piece of technology in their industry to be able to manufacture a much-needed product that is in itself very profitable once available for sale (source: Medicareplus International).

Rather than abandoning these businesses and leaving them to seek funding from unsecured sources such as payday loans or installment loans, there are an increasing number of merchant loan alternatives emerging. The way that merchant cash alternative loans work is by providing the necessary credit on a ‘fixed credit basis'.

How are these loans repaid?

Rather than the loan being provided plus interest to then be repaid via card terminals, a fixed amount is provided with one single charge on top (this is the profit for the borrower). Terms of the loan are agreed between the borrower and lender and then the borrower may start repayments immediately.

Rather than being tied in for a fixed period in the way they may be with typical merchant loans, these alternative products allow early repayment and a greater degree of flexibility.

For example, a business that predominantly accepts cash and bank transfers may need to borrow an amount of money to grow their business. However, they can’t apply for a merchant loan; they need the money quickly and the only option appears to be a payday loan with high interest and a very short repayment period.

They therefore apply for a merchant loan alternative for the amount needed plus the lender’s charges over a predetermined period. If they then find that business picks up greatly and their income increases they can pay off the loan early. Conversely, if they find that business is slowing somewhat they can reduce the repayments having informed the lender and even if payments are a bit late they will not be charged extra as the loan is fixed for them subject to some terms and conditions.

By having the flexibility that these types of loans allow them, a business is able to receive the funds they need to grow and progress, without worrying about tight and sometimes unreasonable deadlines of repayment to avoid additional charges. The business can therefore focus on growing, repaying the loan and progressing as first intended.