The Top Merchant Funding Myths Expelled and Explained

Just like any trend that bucks the mainstream, merchant funding has a swirl of myths that surround the concept. A true departure from traditional lending, arrangements such as the merchant cash advance can be intimidating until you understand the true value. Here are three of the most prevalent merchant funding myths and the reality behind the beliefs.

Myth #1 - Merchant funding arrangements are expensive in the short/long term.

The Truth - Merchant funding is perhaps the cheapest form of financing available to businesses because they’re the opposite of the traditional loan.

According to the US Business Finance Blog, the business transaction is not a loan but a sale. That means no collateral, no down payment, no APR, and no minimum monthly payments. Financing is advanced to you as a percentage of your future invoices or accounts receivable. And the sliding scale repayment means seasonal ebbs and flows can be accounted for.

Myth #2 - Merchant funding arrangements are too complicated to understand for the lay person.

The Truth - Merchant lenders take the time to go over every aspect of the financing agreement.

Western Independent Bankers reveal that more merchant funding banks are creating incentives for new businesses using such financial vehicles as debit cards and linked accounts. In fact, merchant activities are driving the thinking with such lenders as Capital One and other major players.

Myth #3 - Merchant funding arrangements are largely unregulated.

The Truth - The industry is cracking down.

Vendorseek points to the arrival of The North Merchant Cash Advance Association as evidence that the merchant funding and merchant cash advance industries are becoming increasingly safer realms to do business. Federal rules also assist business owners in securing legal, ethical financing.

Business Cash: Leveraging Current and Future Resources to Enhance Market Position

In case you’re wondering, there is no substitute for business cash. Of the myriad of resources, cash opens the most doors for start-ups and established brands to make moves in the market. Here’s why cash is everything, how to identify sources of business cash, and a little-known financing option that you never have to pay back (in the traditional sense of repayment, that is).

Why “Cash is King”
SmartCompany.com illustrates why business cash is so vital. A good measure of the strength of your business lies in its valuation. In other words, if you were to sell your business today, just how much would it be worth? To estimate this figure, financiers use a calculation based on a multiple of the businesses earnings before interest and tax (EBIT).

The problem is that too many businesses list a negative return at the end of the calculation. Why? Because cash flow does not consider human resources, equipment, or other assets traditionally weighed when judging the strength of a business.

Find the Cash in Your Business
Believe it or not, there might be several areas in your operations that can be optimized to increase your cash flow. Small Business Trends offers several suggestions for maximizing business cash and positioning your company for mobility.
1. Send Timely Invoices and Get Paid Sooner. The lag time between project completion and payment will eventually cost much more than the balance of the invoice
2. Foster Lucrative Affiliate Relationships. Partner with other businesses that offer complimentary products and services--increase the perceived value of your venture
3. Study Sales History, Identify Patterns. The unexamined business is not worth running; know your seasonal strengths and weaknesses and reverse them

Get to Know an MCA
The merchant cash advance. Financial backing in exchange for a portion of your future invoices or receipts. Perfect for seasonal businesses and far and away better than traditional loans. Merchant cash advance lenders study your sales history (remember those patterns you were supposed to find?) and will offer you an advance as a percentage of your average sales. Vendorseek says the merchant cash advance industry becoming increasingly viable, completed with governing bodies and best practices. An MCA is certainly a financing option to consider.

Business Loans Can Put Your Business in a Hole Immediately

Small business has always rewarded out-of-the-box thinkers; particularly those who do so with respect to finances. In that spirit, entrepreneurs looking to hurdle a potential trap should think twice before applying for secured and unsecured business loans. Both types of business funding have the potential to put your venture in a hole immediately. Here’s why.

The Pitfalls of Borrowing Money
Yahoo! Small Business offers a comprehensive breakdown of the advantages and disadvantages of securing business financing. As you might expect, the latter outweighs the former in several unique categories. Small business loans become an immediate and substantial business expense. Collateral and annual percentage rates cut into profits and lengthen the amount of time it takes for a venture to become profitable.

The Myth of the Standard Loan
According to Business Week, there’s no such thing as a standard business loan. A collection of variables and contingents can provide a stark contrast of one loan to the next. That’s why it’s crucial to meticulously examine each aspect of a potential loan to determine what they will mean toy our business.

MCAs Let You Avoid Small Business Loans
Vendorseek offers an alternative to small business loans: the merchant cash advance. MCA vendors offer up-front cash for a percentage of future credit card sales. The benefits should be immediately evident. It’s not a loan, so there are no minimum monthly payments to make or threats of forfeited collateral. The pressure is off and small businesses are left to concentrate on accessing new markets.

Small Business Loans Not Out of the Woods Yet

Despite bailouts and legislation, the economy seems to be responding at a snail’s pace, if at all. Small and medium-sized businesses continue to miss loan repayments and relinquish collateral, despite the best efforts of tax payers and a thus far understanding federal government. But as one of the primary banks will demonstrate, the small business loans environment threatens to sink deeper into melancholy.

Delinquent Loans: Businesses Under Pressure
Reuters summarizes the current financial atmosphere by relaying some grim statistics. The firm reports that the level of moderately delinquent accounts rose to 4.45 percent in January--accounts in serious delinquency rose to 1.29 percent. What’s more, the stress from the downturn in commercial real estate is creating additional havoc across markets.

Lending According to Wells Fargo
A recent report of expected loan trends from Wells Fargo paints an even bleaker picture of small business loans. Scrutiny and risk-assessment of traditionally safe investments will prevent many from realizing financing. Real estate or equipment-based loans have the potential to dry up considerably. And cash flow loans may become a thing or the past, save for a few specific situations.

Explore the Alternatives
Fortunately for those considering a start-up or expansion project, small business loans aren’t the only options for financing. Vendorseek reminds entrepreneurs of the merchant cash advance--a form of financing that holds a collection of benefits not found in traditional loans. Credit scores and collateral are irrelevant. All that’s typically required for service is a history of sales.