Is a Merchant Loan Right for Your Business?

By Craig Coleman, CEO of ForwardLine

Many independent retailers have capital needs that come in various forms. Planned growth, time-sensitive opportunities, and remodel updates to a small business all require money. In the past, the traditional route to capital was to attain a business loan through a bank, or to finance business capital through personal credit. Today, there are more options for small business owners to explore including merchant loans.   

What is a merchant loan?

A merchant loan is a short-term loan designed to meet the needs of Main Street businesses. Merchant loans are unique in their attainability and speed, and most loans are funded in a matter of days after an application is completed.

Merchant loans don’t require collateral, which makes them a particularly good choice for independent retailers because often their businesses don’t have significant amounts of collateral and small business owners – understandably – are reluctant to pledge personal assets for a business loan.

In terms of documentation, most merchant lenders only require the last few months of an independent retailer’s credit card statements along with a one or two page application. This simplified application process is ideal for busy owner-operators.

How is a merchant loan different from a bank loan?

Business loans from banks are usually secured by some form of collateral like property, cash reserves or other personal assets. In contrast, merchant loans do not require collateral and therefore approval isn’t tied to the value of the business or personal assets.

Merchant loans are designed to be short-term in nature—as opportunities arise, business owners take out a merchant loan and pay it back in a matter of months, unlike bank loans, which typically have repayment in terms of 3 years or more. Due to the short-term nature of a merchant loan, lending amounts are usually smaller compared to a bank loan and are designed for a specific purpose such as expansion and renovation, hiring seasonal staff or offering new menu items.

Merchant loans also differ from bank loans in their repayment structure. Rather than require a large fixed monthly payment, merchant lenders offer a more manageable daily payment that is either a fixed dollar amount or a fixed percentage of each day’s credit sales. The latter option works particularly well with an independent retailer’s cash flow because repayment rises and falls with daily sales levels.

Traditional bank loans and merchant loans also differ regarding interest rates. Since merchant loans provide short-term financing (typically 12 months or fewer), the cost of financing is higher, since there is more risk on the part of the lender.

Is a merchant loan right for my business?

A merchant loan may be the right option for your business if:

1) You have a time-sensitive need for financing. Merchant loans fund faster than other forms of financing.

2) You do not want to use personal assets to obtain a business loan. Merchant loans do not require collateral—either business or personal.

3) You want an easy, straightforward application process. Merchant loans have a simpler application process that saves many hours of your time compared to a bank loan.

4) The revenues from the financing will have an immediate impact on your business. The short-term nature of a merchant loan means that your business pays off the debt faster, giving you the capacity to borrow in the future if necessary.   

It’s important to that you’re applying for a loan for the right reasons: to help grow your business that already has healthy cash flow. A merchant loan likely isn’t going to help your business if it is in financial danger or if you do not have a clear plan for how the funds will be spent.

The bottom line is that if you’re looking for funding to grow your business, and need it in a timely manner, a merchant loan may be right for you. The good news is that there are numerous options for you and your business so always consider and explore all of your options to make the best choice.