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Merchant Finance

Are you a small business owner in need of quick and accessible financing? Look no further than merchant finance, also known as merchant cash advance. This innovative financing option allows businesses to access cash in a hassle-free and timely manner. In this article, we'll delve into the mechanics of merchant finance and highlight the numerous benefits it can offer for small businesses.

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What is Merchant Finance?

Merchant finance is a type of alternative financing that can be an effective solution for small businesses in need of cash quickly. It is a transaction where the lender advances a lump sum of cash to the borrower, who agrees to pay back the loan with a percentage of their future sales. Merchant finance is also known as merchant cash advance, and it is becoming an increasingly popular financing option for small businesses that may not have access to traditional bank loans or credit lines.

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How Does Merchant Finance Work?

Merchant finance is a popular financing option for small businesses that need quick access to cash. To obtain merchant finance, businesses usually work with providers that specialise in this type of financing. For example, companies such as Kabbage and Fundbox are popular merchant finance providers that offer funding options to small businesses. These providers typically review the business's financial history, credit score, and sales performance to determine the amount of funding the business is eligible to receive. Once approved, the business receives the lump sum of cash, which is repaid through a percentage of their future sales. This repayment structure allows businesses to have more flexibility with their cash flow, as they can repay the financing based on their sales performance.

Benefits of Merchant Finance for Small Businesses

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Quick Access to Cash

Merchant finance is becoming increasingly popular among small businesses due to its quick and easy application process. According to a study by the Federal Reserve Banks, around 44% of small businesses that applied for financing in 2019 used online lenders, many of which offer merchant finance options. These lenders often boast fast application processes that can be completed online, reducing the time it takes for small businesses to access the funds they need. For example, some merchant finance providers like Kabbage and Fundbox claim to offer funding within 24 hours of approval. This can be especially beneficial for small businesses that may need to cover unexpected expenses or take advantage of time-sensitive growth opportunities.

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No Collateral Required

Merchant finance is a type of unsecured financing that allows businesses to receive funding without having to provide collateral. This can be advantageous for small businesses that do not have significant assets to use as collateral for traditional bank loans. Instead, merchant finance providers evaluate a business's creditworthiness and cash flow to determine eligibility for funding. This means that businesses can access funds without putting their assets at risk. In contrast, traditional bank loans typically require collateral, such as real estate or equipment, to secure the loan. Without collateral, businesses may not be able to access the funding they need to grow or meet unexpected expenses.

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Flexible Repayment Terms

Merchant finance providers offer a variety of repayment terms based on the business's sales. One common structure is a fixed percentage of daily or weekly sales, which can range from 5% to 20%. This means that as the business makes sales, a portion of that revenue is automatically deducted to repay the funding. For example, if a business receives $10,000 in merchant finance and agrees to a 10% repayment rate, then $1,000 of each day's sales would go towards repaying the funding. Some providers may also offer the option to adjust the repayment percentage based on the business's sales volume, which can provide even greater flexibility. Additionally, some providers may offer a repayment holiday, which allows businesses to pause or reduce their repayments for a short period of time if they experience a temporary slowdown in sales.

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Easy Application Process

Merchant finance offers businesses a simpler and faster application process than traditional bank loans. Unlike bank loans, which often require extensive documentation and a credit check, businesses can apply for merchant finance with minimal paperwork. This can be particularly beneficial for small businesses with less established financial histories or credit challenges, as they may not be able to meet the strict criteria required by traditional lenders. By simplifying the application process, merchant finance providers can help small businesses access the funding they need to grow and thrive.

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Predictable Payments

Merchant finance providers offer predictable payments based on a percentage of the business's future sales. This means that businesses can budget and plan for their payments, reducing the risk of unexpected expenses or financial surprises. For example, if a business receives $100,000 in merchant finance and agrees to repay 10% of their future sales, they will repay $10,000 for every $100,000 in sales. This payment structure provides small businesses with greater cash flow flexibility and can help them avoid unexpected expenses or financial surprises.

In Conclusion

Merchant finance provides small businesses with a quick and flexible financing option that can be particularly beneficial for those with less established financial histories or credit challenges. With no collateral required, flexible repayment terms, and a simple application process, merchant finance can provide small businesses with the cash they need to grow and succeed. If you're a small business owner looking for financing options, consider exploring merchant finance to see if it's the right fit for your business.

Synthesis Capital is a venture capital firm based in London, focused on investing in innovative food tech start-ups. With a strong passion for helping entrepreneurs turn their visions into successful businesses, Synthesis Capital has become a leader in the food tech investment space. The firm's investment philosophy is centred around identifying cutting-edge technologies that have the potential to revolutionise the food industry, and partnering with driven and dynamic founders to bring these solutions to market. Synthesis Capital's extensive network and expertise in the food tech sector has enabled them to support portfolio companies in achieving their growth and development goals.