Cash flow to a business is what oxygen is to the human body. Liquidity allows a business to maintain inventory, make payments to suppliers of raw materials, bear overhead expenses, pay salaries to employees and grow the business. The funds that a business has for these purposes is known as its working capital, which is a measure of its financial health.
While working capital is essential for any business, most suffer a liquidity crunch. This is because businesses need to incur expenses much before their revenues become due. They need to invest in equipment, pay for raw materials and offer wages to workers to produce goods, and only then sell these goods to generate an income.
Businesses cannot thrive or even survive without the lifeline of liquidity. So, how do businesses ensure that they have adequate funds to manage their daily operations? Large organizations have goodwill and negotiating power, both of which allow them to delay some of their payments until their revenues come in. They can also approach traditional banking institutions to take loans to tide over periods of low liquidity. On the other hand, smaller firms typically do not have such luxuries. The only option for them is to turn to more innovative loans for small businesses like merchant cash advance loans.
Merchant cash advances are fast emerging as a popular option for small and retail businesses to meet their short-term funding requirements. These loans are highly popular among firms that lack credit rating and do not have the collateral to access regular bank loans. Prudent financial planning and timely decisions can help businesses use merchant cash advances to their advantage. Read on to know the advantages of such loans for small businesses.
A merchant cash advance, as the name suggests, is a cash advance to merchants against their future payment receivables via credit or debit cards. The repayments of these loans are set up as a fixed percentage of the company’s daily credit or debit card income and are tied directly with the company that clears and settles the payments. Here are 5 reasons to opt for merchant cash advances:
Easily Accessibility: The approval of these loans is not dependent on either the credit rating of the business or the furnishing of collateral. Therefore, they are easily accessible by small businesses.
Easy Application Process: Such loans can be accessed online from the websites of leading FinTech companies. The application process is straightforward and can be done from anywhere and at any time. Only few documents are required, which can also be uploaded online.
Fast Approval Process: Traditional banking institutions may take weeks or even months to collate all the documents, evaluate financial statements, tax returns and business plans and conduct a complex process of due diligence to approve loans. On the other hand, merchant cash advance loans may be approved by FinTech lenders within hours. Such loans are smooth from start to finish.
High Approval Rate: The approval of merchant cash advances is dependent only on how long the business has been in existence and its monthly credit card receivables. Therefore, their approval rate is very high.
Revenue-Based Collections: FinTech lenders who have associations with several credit card companies are able to make the loan repayment process very smooth. Merchant cash advances tie repayments to the payments received by the business. Thus, the lenders get paid only when the business gets paid. This is among the most compelling advantages of such loans for small businesses. Collections can fluctuate based on the sales volume of the business.
Merchant cash advance loans provide financing solutions for small businesses where none other exists. Traditional banking institutes have stringent eligibility criteria, which small businesses most often cannot meet. Such commercial loans typically require collateral, which small businesses do not have. Despite these benefits, critics of merchant cash advances say that these loans require refinancing. In order to avoid such situations, a business needs to be careful when estimating its need for funds and choosing the right financial product. Here are some features of good merchant cash advance loans:
Credit Range: A good lender would offer a wide credit range, say from ₹1 lakh to ₹1 crore. This provides a business flexibility to choose the amount depending on its monthly card settlement.
Loan Percentage: A business should choose a product that offers a loan amount of up to 200% of its monthly card settlement.
Equally important is the choice of lender. Since FinTech companies are relatively new, a business can use the following criteria to choose the lender:
Check the credentials of the management team
Check whether the FinTech company has received funding
Find out if the FinTech lender has close tie-ups with credit card companies
Check whether the FinTech firm has won awards for its performance
Ensure that the lender promises complete transparency into fees and charges Ensure that the lender allows prepayment of loans. This is very important, since it allows a business to save on interest payouts
Raising loans for small businesses has become a significantly easier, faster and hassle-free process after the rise of the FinTech sector in India. Among the various options, merchant cash advance loans have gained popularity due to their high approval rates and smooth repayment processes. Small businesses can now have sufficient cash flows to conduct their daily operations without any hiccups, while also having funds to grow the business.