For businesses that accept credit cards or have a substantial number of invoices, merchant account funding can be a very quick way in order to receive a substantial amount of money without needing to go through a tremendous number of formalities in regards to getting a business loan. For companies that have been in operation for over two years, and among businesses that accept credit cards – merchant account funding can provide a term loan that usually lasts about 2 to 3 years. The downside to this type of financing is that it is generally considered to be expensive. The annualized interest rates for merchant account funding are typically about 10%. Usually, the merchant account financing company will directly take debits from each credit card transaction that is processed by the merchant. This is one of the ways that these lending companies reduce their risk given that each time a sale is made or transaction occurs – they are able to recoup a portion of their loan. Generally, a merchant account loan typically has a fixed loan fee. The amount debited from each transaction typically ranges anywhere from 10% to 30% depending on the overall term of the loan. The higher the amount debited from each transaction – generally the lower the loan fee.
These types of loans can typically be used for any type of business purpose. Commonly, a merchant account loan can be used for inventory acquisitions, general working capital, tax planning, factoring of invoices, payroll, and any other appropriate business expense. The companies that typically use these types of loans are generally inventory focus businesses as well as service based companies that are expanding. There are usually very few limitations as to what this funding can be used for on an ongoing basis. These types of financing programs have exploded in popularity over the past 10 years. This is primarily due to the fact that many freelancers are now able to accept credit cards through companies like PayPal, Authorize.net, Square, and related entities. This trend is expected to continue as more and more people become freelancers or established small businesses.
As with any type of debt obligation, a certified public accountant should be consulted before using this type of financing. Again, the fees associated with this type of funding can be quite expensive. As such, if there are lower cost available avenues available you may want to examine them first before committing to a merchant account funding loan. In lieu of this type of funding, many entrepreneurs will seek to take out a working capital line of credit which typically carries a lower interest rate. This is one of the determinations that an entrepreneur should make when figuring out what is the best way to finance.
On a side note, many new businesses that have just established operations are not funding loan. This is primarily due to the fact that these types of financing are available only to established businesses that have two years of credit card-based transactions. The amount of money that a person can borrow as it relates to their credit and debit card transactions is typically 10% to 40% of the total annual billable revenues of the business. As such, a merchant account funding company is going want to see an extensive track record as to the amount of yearly revenues are generated through credit and debit card transactions.
In closing, a merchant account loan can be a great way to fund a rapidly expanding business. In many cases, the personal credit of the borrower is not factored into the decision as it relates to obtaining this type of financing. Again, this is primarily due to the fact that this type of loan available to a entrepreneur based solely on the amount of revenue generated on a yearly basis.