What are the Different Types of Merchant Funding?

Charity Delich

Merchant funding is a mechanism used by business owners to achieve advance financing for their companies. It is particularly useful for merchants who operate in the retail or service-oriented industries, such as clothing and furniture store operators, restaurant owners, and grocers. These businesses usually need large amounts of cash up front so that they can purchase inventory and supplies. Several different types of merchant funding are available to help companies secure business funds. Some of the most common types include cash advances, business loans, and business lines of credit.

Man climbing a rope
Man climbing a rope

A merchant cash advance generally works by allowing a business to sell its future credit card sales in exchange for a lump sum of cash that it can immediately invest in the business. This type of funding usually requires the business to reach a certain gross credit card sales dollar amount each month. In order to qualify for a merchant advance, a company usually needs to submit an application, including customer credit card purchase statements, to the merchant funding lender. Based on the application and financial statements, the lender then determines how much cash it will give the company. When the merchant’s customers make credit card payments, a small percentage of the sales is directed to repaying the cash advance.

As a general rule, most merchant funding companies do not dictate how the funds can be used. In addition, merchants are not required to make fixed payments, making this type of funding convenient. Typically, lenders can provide cash advances quickly, often within as little as seven business days. When selecting a lender, merchants should be careful because many lenders charge high premiums on the money they advance. Some merchants may be able to secure better overall funding by taking out a loan or line of credit.

A business loan is another way for merchants to fund purchases. Like a standard loan, it requires the borrower to repay the loan by a certain date and at a set interest rate. Based on a credit analysis of the borrower, a bank or other lender usually sets the loan and interest amounts as well as the repayment plan. Business loans can be used for a range of functions, such as making up operating capital shortfalls, opening new business locations, starting new business lines, or launching a brand-new business.

Merchant funding can also be obtained by getting a business line of credit from a bank or other lending institution. A line of credit allows a merchant to access a certain amount of funds at any time. The amount is usually set by the lending institution based on the merchant’s past revenues as well as anticipated annual cash flow. Most businesses use lines or credit to cover short-term needs, such as buying seasonal inventory or covering cash flow shortages.

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