Merchant Loans Explained by David Soffer

Thursday, 2 November 2017

Getting funding for businesses and securing ideal business loans are nothing new. However, the number of options available with which all nature of businesses can secure funding are on the increase. Furthermore, getting loans and the correct funding is one of the most important parts of any business venture. Few businesses in the 21st Century are lucky enough to have every bit of funding ready from the start and therefore, lenders are very often seeing increases in applications.

There is also a growing trend for businesses and borrowers to seek out specialist products and lenders. One of the fundamental advantages of this is that the lender and their underwriters will be better placed and informed to understand a business’ specific challenges. One such example are merchant loans, which are tailored for businesses that accept credit and debit card payments via payment terminals. However, some businesses are not suited to these loans. A company offering a business to business service such as a security company for example, are unlikely to accept enough card payments to justify a loan and most of their income will be via bank transfers, cheque and cash payments (source: Secure Site).

These loans are popular amongst retail and other relevant businesses and the lenders have well-established, tried and tested processes and systems in place to make merchant loans as straightforward as possible.

How do they work?

These loans are sometimes referred to as ‘merchant cash advance’ loans. This is because the lender will literally give the borrowing party [the merchant] the funds as an advance. The loan repayments then are ultimately treated as other business loans are and a predetermined amount is repaid each month.

Where these loans differ though are that their payments come exclusively from card terminals and they take a proportion of the revenue through these means. Part of the application and approval process with merchant loans is that the borrower will apply and will need to state what their turnover through their payment terminals is. They will then also specify the amount of money they need to borrow and then often also the amount of time over which they will repay.

The lender in question will carry out their relevant credit, business and affordability checks to ensure the borrower is a good lending prospect and then, subject to this and their internal processes and procedure,s they will approve the loan. Repayments however, do also differ from those of normal business or retail loans. As opposed to paying back a set amount each month, the borrower’s repayments are calculated as a proportion or percentage of their card revenue.

An Example

A clothes shop need an advance of £20,000 in order to pay some outstanding bills and cover a new range of exclusive stock. With banks and traditional high street lenders being more selective with who they lend to, they do not feel comfortable taking out a traditional business loan and do not want to risk being rejected for a loan which may harm their credit rating.

They therefore look to apply for a merchant loan of £20,000. They fill in an application with a reputable provider with all the relevant details stating the amount they wish to borrow and they state their turnover of £5,000 per month in credit card sales through their payment terminals.

The lender, satisfied with all of their relevant checks and balances, agrees to provide an upfront amount to the shop of £20,000 to be repaid over 12 months. The shop will need to repay £2,000 (40%) per month to the lender, totalling an overall cost of £24,000, spread out over the agreed 12 month period.

If the lender agrees the loan to be as a proportion of monthly takings via the credit card terminals, then should the amount of money increase one month the shop will pay more and should that decrease this will also be reflected. This is one of the benefits of these loans, that in comparison to traditional business loans they are more flexible.

The Drawbacks of Merchant Loans

Whilst these loans are often a very useful tool at a qualifying business’ disposal, they are not suitable for many others. This includes businesses such as florists, hairdressers and many takeaways who do not collect significant card payments, relying mainly on cash. Additionally, merchant loan providers will require the borrowing business to change their card payment provider.

This is because most lenders of these loans will have a company of preference with whom they will work to implement the loan repayments via what is known as the ‘New Gateway Method’ of borrowing and repayments. This works by the lender setting up the borrower with a new card payment provider who will each month deduct the percentage of turnover for the lender, giving the borrower the remaining amount.

Another potential drawback is that these loans are not suitable for all uses. For example, if a business that owns multiple premises is refurbishing one of their properties but needs some additional funds whilst the second premises is not generating business, a lender may not necessarily lend to them as it may not fit their criteria for the use of a merchant loan in the way that purchasing stock or paying staff wages may.

David Soffer is a London-based SEO Consultant and part of Tudor Lodge Consultants who work extensively with various property finance firms, lenders and brokers ensuring they are found online.