Merchant funding is fast becoming the alternative financing option of choice for small businesses seeking start-up or expansion capital. However, as with most financial vehicles, it’s not without its hitches. Here’s more on merchant funding activities from several consumer fronts.
How Merchant Funding Works
The GreenDOC blog offers a fairly robust explanation of the merchant funding agreement. Perhaps the most alluring benefit is that it requires no collateral or personal guarantee by the borrower. In fact, if you've owned a business for at least 6 months and process at least $3,500 in monthly credit card sales, chances are that you can secure a merchant funding agreement.
The Ugly Underbelly of Merchant Funding
Despite the seeming innocence of this funding source, there are always pitfalls of which you should be aware. DIRECT Mag reveals the seedy side of merchant funding deals that come with illegible fine print and outrageous annual percentage rates. For example, the FTC recently cracked won on several merchant lenders who charged as much as a 4.981% annual percentage rate--hidden in extremely fine print.
Evaluating a Potential Merchant Funding Partner
BusinessWeek offers several techniques for evaluating a choosing a merchant funding partner that will ensure that you don’t get the short end of the stick. These include checking with potential lenders for quality, asking for and following-up with referrals from former clients, and signing an ironclad contract that your personal business attorney reviews for accuracy.
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A follow up to merchant funding. This is an ideal capital vehicle for seasonal business that must endure the ups and downs of yearly business. Think businesses that rely on Christmas, Easter, Halloween and summer for their big profits.
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