Could Merchant Funding Help Your Business?

Does your business need money or funding? There are a lot of ways to get that funding. However, there are some newer, less-used ways that you should be aware of, whether it’s because they are good options for you, or because they have hidden dangers for your business.

Merchant Funding or Cash Advances

One lesser known way to get funding is through merchant funding, or a merchant cash advance. The cash advance company will loan you the money you need. You do not have a set repayment schedule, the way you would with a traditional loan.

Rather, you pay the company back, through money that your business makes in the future. This is often done as a percentage; if you make more on a given day or week, you pay more. If you have a bad business spell, you will pay less. The company will look to your past sales, to determine whether you are a good “bet,” and make your loan to you based on that sales history, regardless of your credit.

Advantages and Disadvantages

There are some advantages to merchant funding. For businesses that are less credit-worthy, these kinds of loans are betting on your income in the future—not your credit. That means that they may be more likely to loan you the money, even if you have poor or no credit.

Another benefit is that if you don’t make as much—say, you are a seasonal business that makes less during certain times of year—you will pay less. This may provide some flexibility for you.

But there are some hidden dangers in this kind of funding. The companies will often withdraw their share from your bank account daily. To do this, they will often require that you open a joint bank account with them, or give them the right to access your account.

This can lead to cash flow issues. You cannot, for example, save up money for your monthly payment the way you normally would in an installment payment loan. Rather, the merchant funding company will automatically withdraw what they are owed—you will never see that money, or be able to use it. This can result in cash flow problems.

Additionally, the amount you are paying to them from your daily or weekly sales, when calculated as interest, would often end up being a much higher interest rate than you’d pay on a traditional loan.

Invoice Factoring

Note that merchant funding is different from invoice factoring, or purchase order funding. This is where a company pays you, before your customers pay you. You then assign what your customers owe you, to the funding company.

The funding company will often pay you a bit less than what the customer owes you under the purchase order, because the difference is their fee. When calculated as if it was interest, the amount taken out can be a significant interest rate, or a big chunk of what you would get if you had just waited for the client to pay.

Our Fort Lauderdale construction attorneys at Sweeney Law P.A. at 954 440-3993 can help you with your business contracts and understanding the legalities of your business and construction operations.

Sources:

fundbox.com/resources/guides/purchase-order-financing/

arfunding.com/industry-news/merchant-cash-advances-vs-invoice-factoring/