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SpinDistribute.com Article Directory

The following article was published in our article directory on May 17, 2010.
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Understanding Merchant Cash Advance Options

Article Category: Business

Author Name: Stephen Bush

For most small businesses trying to cut costs and improve cash flow, a review of potential critical problems to avoid with credit card factoring will be time well spent when getting back to basics for merchant cash advances and credit card processing. As just one example, a critical precaution to observe when a small business owner is considering merchant cash advance services is that the company providing the business financing does not prematurely change credit card processors before determining if they can provide the desired working capital. An evaluation of whether a lender can provide financing and in what amount is a more normal and appropriate initial approach for the commercial funding provider. The next step if the initial merchant cash advance findings were acceptable to the business borrower would then be checking with the existing processor to determine their ability to facilitate repayment of the working capital to be advanced to the business borrower. Attempts to change processing arrangements immediately are a clear indication of one of the most serious abuses seen during recent years for companies appearing to offer credit card receivables factoring.

Business cash advance services are an increasingly important financing tool for small business owners to get short term business financing relatively quickly. This strategy for obtaining working capital funding is used by many diverse businesses because they do not have another reliable commercial funding source. Since banks are routinely reducing or eliminating business lines of credit in almost all areas for small businesses, the practical need to consider this option has also increased. To obtain business funding based upon credit card factoring, a minimum monthly volume of credit card sales is required. When merchant cash advances are obtained by a business, a lump sum payment is received based on projected future credit card processing transactions. The business financing is repaid gradually and automatically (usually covering about six to nine months) as credit card transactions are processed.

It is not unusual to hear that costs or terms were not reviewed thoroughly before signing a processing agreement, often because small business owners chose their credit card processor based upon a recommendation from a colleague or banker. Businesses should consider asking for a review of cost saving opportunities involving their credit card processing even if their current processor is willing to work with the business cash advance provider. This might be the perfect opportunity to review the cost structure currently in place for a business because this approach to small business financing options is tied so directly to credit card processing activity.

As mentioned, to repay a business cash advance, future credit card processing activity is used. To accomplish the repayment, a portion of each transaction is automatically allocated. The processor must agree in advance to handle the requirement in order for this to happen. Helping in this way with the merchant cash advance repayment process will not be accepted by all credit card processing providers. When this occurs, alternative processors can usually be arranged with minimal impact on daily business operations. Because costs were often overlooked when the initial agreement was signed, with a thorough review of working capital options, a common occurrence is for a small business to realize significant cost reductions when replacing one credit card processing provider with another.

Because many businesses have experienced both decreased sales and an increased difficulty in obtaining bank financing, a thorough review of basic credit card factoring and working capital management practices should be helpful to most commercial borrowers. For even the most successful small business, the potential reduction of a significant business expense is likely to be appealing. It is usually a good idea to get back to basics, and this approach will be particularly valuable for small business owners if they can reduce credit card processing costs while increasing their cash flow with a merchant cash advance. While they were not discussed here, there are other working capital financing options to consider for a business which does not accept credit cards from customers as a payment option.

Keywords: merchant cash advances,business cash advance,credit card processing,working capital,business,finance

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