Merchant Financing 101: What You Need to Know

If your business is in the B2C retail space and most (or possibly all) of your transactions are conducted via credit card or debit card, then merchant financing might be the flexible funding solution you need to cover expenses, make investments, and keep your business on track for future growth. Since there are some misunderstandings and myths surrounding merchant financing — often propagated by banks that don’t offer this solution — here are some of the most important things that you will need to know about this type of financing:

What Is Merchant Financing?

Merchant financing, also known as revenue-based financing, is a financing tool that allows you to receive a lump sum of money upfront in exchange for a percentage of future sales, or a fixed amount of daily or weekly payments. This type of financing is often used by small businesses, especially ones with fluctuating revenue - and it comes with multiple benefits, such as flexible payment terms (it’s based entirely on day-to-day sales) and no need for real estate collateral.

What Are the Benefits of Merchant Financing?

As we just mentioned, your business can highly benefit from merchant financing - here are some of its main benefits:

• Quick Access to Cash - This type of financing provides fast access to funds, often within days or up to 72 hours if you are applying with National Business Capital. This gives you the opportunity to cover urgent expenses in a timely manner.
• Flexible Terms - Another major benefit of merchant financing is the flexibility when it comes to repayment schedules - as opposed to traditional loans where terms are very strict, merchant financing adjusts based on your cash flow.
• No Fixed Collateral - In contrast to traditional business loans, merchant financing often doesn't require fixed collateral, making it accessible to businesses without significant assets.
• Easier Approval - If you have a lower credit score or limited credit history, you may find it easier to qualify for merchant financing compared to traditional bank loans. No Fixed Monthly Payments: Since repayment is linked to sales, there's no fixed monthly payment, which can provide more financial flexibility for your business.

4 Things You Need to Know About Merchant Financing

1. You can use merchant financing for any purpose

Most bank loans come with strings attached — including one that obligates you to use the funding for a specific purpose, such as buying inventory, upgrading a facility, and so on. If you deviate from the plan, then you could be in breach of contract and your loan could be called in. However, with merchant financing there are no spending rules or restrictions. You can use the cash to cover temporary shortfalls, purchase equipment, pay for advertising campaigns, implement new technology — and the list goes on.

2. Your total cost of borrowing won’t go up if you take longer to repay the financing

Merchant financing is technically an advance on future credit and debit card sales vs. a conventional business loan. At the end of each business day, a small portion of your daily sales is calculated (e.g. 2.5 percent), and that amount is automatically withdrawn and applied against the advance. One of the key advantages of this approach — and a factor that makes merchant financing distinct from other kinds of business funding — is that you won’t pay a higher total cost of borrowing if it takes you longer than anticipated to repay the advance. Your total cost remains fixed and known from day one, which gives you more control, predictability and stability.

3. You don’t have to pledge business and/or personal assets to secure merchant financing

Unlike a conventional bank loan, some lenders — including National Business Capital — offer unsecured merchant financing. This means you don’t have to pledge business and/or personal assets as collateral, nor do you have to endure a prolonged collateral valuation process that often takes weeks; or sometimes months.

4. You can combine merchant financing with other business funding solutions

If it’s beneficial to do so, you can combine merchant financing with other business funding solutions. For example, many of our merchant financing customers also obtain a revolving business line of credit to cover unexpected, short-term expenses. And since interest is only charged on the amount borrowed, having this option as a contingency makes strategic sense.

What Are the Qualification Requirements for Merchant Financing?

As opposed to traditional business loans, merchant finance has less stringent requirements - meaning it’s accessible to a broad number of businesses. If you want to qualify for this type of financing, it’s important to keep in mind that the exact requirements may vary by lender. However, some of the more common requirements include:

• Credit Card Sales Volume - Since merchant financing is repaid through a percentage of daily credit card sales, you will need to have a consistent and sufficient volume of credit card transactions.
• Credit Score - While personal or business credit scores are considered, they are usually less critical than for traditional loans. You can qualify even if you have a lower credit score.
• Financial Health - Lenders will often review your business’s financial health, including bank statements, to assess cash flow and ensure you can meet the repayment requirements.
• Industry Type - Some industries can be more attractive for merchant financing providers, especially the ones with steady sales and high transaction volumes - such as retail and hospitality.
• Outstanding Debt - If your business already has a significant amount of existing debt, especially other merchant cash advances, it may impact your eligibility or the amount you can borrow.
• Time in Business - Your business needs to be in operation for at least 1 year before applying for merchant financing. This requirement ensures the business has a track record of sales and stability.

How to Get Merchant Financing with National Business Capital

Simply call (877) 482-3008 to speak with a member of our team, or fill out our simple 1-minute application online to get the ball rolling, and receive a secured or unsecured business loan of your choice in as little as 24 hours! We are excited to learn about your business financing needs and goals, help you understand the details of our unsecured loan products (we offer several), and answer all of your questions clearly, honestly, and without any confusing jargon.