Merchant Cash Advances And Credit Card Processing Basics

It is frequently a good idea to get back to basics

, and this is particularly appropriate for small business owners when they are reviewing if they can increase their cash flow with business cash advances while reducing credit card processing costs. Because many businesses have experienced both decreased sales and increased difficulty in obtaining bank financing, this review of basic working capital management processes should be helpful to most commercial borrowers. The possibility of reducing a significant business expense is likely to be appealing to even the most successful small businesses.

While they will not be 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. In most cases, to obtain business funding based upon credit card factoring requires a minimum monthly volume of credit card sales which typically varies from $5000 to $10000. A lump sum payment is received based on projected future credit card processing transactions when merchant cash advances are obtained by a business. The amount of business financing is then repaid gradually (typically over six to nine months) and automatically as credit card purchases are processed. Because they do not have another reliable commercial funding source, this strategy for obtaining working capital is used by many diverse businesses. Because 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.

Because this approach to working capital financing is tied so directly to credit card processing volume, it provides the perfect opportunity to review the cost structure currently in place for a business. Many small business owners chose their credit card processor based upon a recommendation from a colleague or banker. It is not unusual to hear that costs or terms were not reviewed thoroughly before signing a processing agreement.

As noted, business cash advances are repaid by using future credit card processing activity. A portion of each transaction is automatically allocated toward repayment. In order for this to happen, the processor must agree in advance to handle it properly. Not all credit card processing providers will agree to help with the merchant cash advance repayment process. 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, a common occurrence is for a small business to realize significant cost reductions when replacing one credit card processing provider with another.

One of the primary precautions to observe when a small business owner is considering a business cash advance is to ensure that the company providing the business financing does not rush to change credit card processors before determining if they can complete the desired working capital financing. 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 merchant cash advances. A more normal and appropriate approach is for the commercial funding provider to initially evaluate whether they can provide financing and in what amount. If this is acceptable to the business, the next step would be to check with the existing processor to determine their ability to facilitate repayment of the working capital to be advanced to the business borrower. While it might not be a normal way to proceed, some 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.

by: Stephen Bush

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