Running a business successfully is perhaps one of the most challenging tasks in modern times. The reason is that there are so many unmitigated risks and surprises, which can spring up at any time. For instance, who would have anticipated that coronavirus, will spring up out of the blues, become a pandemic and hold the entire business world at its jugular?
Some of the risks associated with running a business may be many and varied, but running out of cash should not be one of them. What if there is a business or a company that provides businesses with every time the need arises? What if you are that business that provides cash to other businesses?
Merchant cash advance, as a new business model is one of the most innovative products in the alternative business finance world, as this business model has saved many businesses the stress and hassles of securing traditional bank loans. The concept of merchant cash advance though, has only existed for few years, it has however become very popular with small businesses, particularly in the retail and leisure sector.
Merchant cash advance business is what experts in the field called “using your card terminal to secure’ lending”, for businesses with high volume of card transactions every month. Repayments for the cash advance are taken as a fraction of revenue, with agreed additional fees, making it a quick and easy funding solution for many SMEs.
In this guide, we will be providing you with detailed information on how you can start and profit from merchant cash advance business.
Maybe you will be wondering, what is merchant cash advance business?
What is a Merchant Cash Advance?
A merchant cash advance is a business set up that gives businesses cash to run their operations against future sales. It simply means you can give XYZ Company $1000 advance cash, which they will pay back with future sales of their products/services. Merchant cash advance business is generally offered to businesses that have a steady stream of sales/income, which can be in the form of volume credit card sales, and this type of business model is open to such businesses as medical offices, restaurants and retail stores.
In business terms, a merchant cash advance is not considered as a loan. This is because, with regards to loans, the borrower gets a loan, make regular repayments on the principal with interest, while with a merchant cash advance, the borrower simply gets the cash up-front, and the lender automatically deducts a percentage of daily debit and credit sales with agreed additional fees on each deduction.
It is important to note that Merchant Cash Advance is also open to receiving cash as form of repayment, as some merchant cash advance business owners, use the Automated Clearing House (ACH) to make regular withdrawals from the borrower’s bank account.
So before deciding on starting a merchant cash advance business, it is important to have a proper understanding of how it works.
So how does Merchant Cash Advance Works?
Every transaction that involves money, naturally requires that some laid down steps and procedures are followed, so everyone involved will know what they are getting into. In order for you to professionally and smoothly run your merchant cash advance business, there should be an agreement between you, who is the merchant cash advance business owner and the business owners you will be providing with cash.
The scope of the agreement should cover the advance amount, holdback, payback amount and duration of the advance. Once the agreement is made, you can then transfer the agreed amount to the business’ owner bank account in exchange for a future percentage of credit card receipts from the business which could be daily, weekly or monthly.
Once the agreement has been reached and the cash transferred to the merchant, as a merchant cash advance business owner, you will have access to the merchant’s bank account, this no doubt eliminate the need for as collateral, as traditional banks would normally request for collateral for loans. With the access to the merchant’s bank account, you will be able to know the daily credit cards receipts withheld in the merchants account, and these daily withholding is called holdback, and this holdback will be in place until the cash advance is paid in full by the merchant.
The beauty of merchant advance cash business is that since repayment is tied to daily balance in the merchants’ account, as a percentage of sales, it implies that more credit card transactions by the business, will mean faster repayment of the advance. However, if transactions are lower on any given day, the holdback from the merchant account will be less.
Procedures for giving cash advance to Businesses
The time it will take for you to approve and provide cash advance to businesses will depend on the paperwork and other details as you may request from the businesses, and this may range from hours to days for the process to be completed.
To enable you give cash advances to businesses, it is important each of them go through the following processes:
• Apply for funding
• Provide documentation
• Get approved
• Set up the credit card processing
• Finalize the details
After the whole process is approved, the business owner could see the funds in their account within two days. The application process is not as complicated as other business loan types, which typically makes the merchant cash advance approval process a faster option.
Requirements in getting started as a merchant cash advance Business owner
• Money (at least $500,000 or less depending on scale) for startup costs, marketing and funds to lend.
Starting up a business would require a specific amount of money. You may decide to use your savings or find alternative sources of funding to enable you get started in your merchant cash advance business. The capital will be needed to fund different sectors of the business, like giving funds to merchants, and every other operational costs of running a business.
• Marketing plan – Your marketing plan should highlight how you will get the merchants you will give cash to and the cost to acquire each client. It should specify if you are using paid advertising, word of mouth/mouse, introductions/recommendations, etc.
• Pricing – Once you have clients, you have to evaluate their applications, so you can then decide how much you can give them, for how long, and at what factor rate.
When the clients start coming to you, you need to evaluate them properly. You should consider the clients market requirements and present situation. It is the client’s market requirement and situation that will help you take a decision. Many other factors should also be considered.
A factor rate, which is used to calculate the cost of the advance interest rate percentage, will help you in determining your pricing. The factor rate will vary significantly depending on industry, risk and trading performance, but you can expect it to range from between 1.1 to 1.5.
For example, if you lend $15,000 and the factor rate offered is 1.2, the merchant will repay a total amount of $15,000. The fees are worked out by just multiplying the amount you gave the merchant by the factor rate ($15,000 x 1.20 = $15,000). In this case, it will cost the merchant $5,000, which will also serve as your profit.
• Underwriting – Once you have clients you have to underwrite the file, to determine if the application is fraudulent for instance or not, or if there is any information they are not disclosing correctly. There are lots of tools you can use to check credit score, bank verifications and background checks.
• Collection of Return – You have to set up bank accounts, so you can deal with Wire Transfers, ACH processing companies, and agreements with credit card processing and lockbox companies?
By the time you start getting returns, you should be aware of all the bank accounts setups, the transfer of the funds, and many other factors required to know. Key factors that will facilitate the success of your business will be ranging from collecting the returns timely and helping your clients accordingly to develop and prosper their business.
• Collection of Bad Debt – You have to set up a mechanism for the collection of bad debts, as things sometimes may not go as planned. Who wants to run a business, if they cannot get their money back?
Certified clients for your merchant cash business
Businesses most suited to patronize your new business will be those operating in the following sectors, and because they process a lot of payments through debit card or credit card sales, you will never run out of clients for your new merchant cash advance business.
Restaurants and takeaways
Merchant cash advance business is well suited for restaurants as they transact with a high level of card turnovers.
For instance, many restaurants need cash advance for equipment, remodeling, re-stocking etc., so you can position your business to offer the needed cash and take a killing from their profits.
High street retail shops and other convenience stores are at the heart of the community. Most high street retails shops are facing a tough time as a result of the lock down, it then implies that your cash advance business will mean many high street retailers will have regular access to the funding they need to survive and thrive.
Online e-commerce stores
Your merchant cash advance business will be helpful for online sellers. For instance, you can provide cash for sellers on eBay who needs to get more stocks or a Shopify seller that wants to drive more traffic to their site.
Pubs, bars and clubs
You can consider giving cash advance to pubs, bars and clubs, especially gastropubs that take card payments from customers who make food and drink orders.
Hotels and B&Bs
There has been a steady increase of travelers and holidaymakers, so Hotels and Bread and Breakfast owners are racing to keep up with demand.
It then implies that you can take advantage of this by providing cash advance to them so they can scale up and you profit from it.
Hairdressers most times need new equipment, fittings, signage, marketing or any other funding requirement, so your merchant cash advance business should be a perfect solution for hairdressers and beauty clinicians.
Car service, MOT, Tyres, and garages
Your merchant cash advance business should be a perfect fit for garages seeking for funding for Vehicle Lifts, ATL, OPTL Test Lane equipment, MOT wheel and tyre equipment, roller brake kit and more. Since their nature of business allows for credit card payments, you can take advantage of these opportunities and profit from your merchant cash advance business.
Action is cure! It is your sole responsibility to take advantage of the information you have gotten from this practical guide and decide right now to get started as a merchant cash advance business owner. More and more hours of reading will be meaningless, till you are ready to take action. Are you ready and willing? Let’s go!
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