To ensure movement and activity thinly regulated store and other small business owners are turning to high-cost merchant cash advances. These working set-ups are facing the worst times with weak sales and really tight credit standing. These small business owners fall in the category of high risk borrowers, since they claim huge amounts to keep their set-ups intact till their earnings flow in at really high interest rates but with little or no cash or security or collateral. Researches claim that now more than 40 companies are issuing cash advances to such small businesses, growing from a mere handful a decade ago.
These loans are allowed to these businesses keeping the future sales as base prerogative and a fixed fee amount on the customer’s credit and debit card purchases on a daily basis till the time a merchant cash advance is paid. The real lure behind the entire game is the promise of very high interests to the lender. Most providers form partnerships with card-payment processors and take payments directly from a business owner's card-swipe terminal. However, these cash advances or cash advance loans pose a challenge of their own kind for these small business borrowers. Since the cash advances are based on the technical sales of the future assets, rather than direct loans or credit, providers are not bound by any Consumer Protection Act.
However the last two quarters have seen an extended allowance of around 60 % of these merchant cash advances. With the new small businesses entering the market easily and freely these firms will never have dearth of applicant looking for money to keep their set-ups going at lease for the first four quarters. And daily sales data from thousands of businesses enables the money lenders to develop better models of risk management and underwriting than most banks, depending on which helps in analysing past credit-risk scores assuring sound lending decisions.
These private money lending firms are also on the rise since in the past year, traditional bank model has denied 69% loans applications from these small business firms. For the same study reveals the trend as these ‘small-business owners tend to look to banks first for capital, though only one-third obtain collateral-based loans. At least one in 10 seek nonbank financing options, including cash advances or peer-to-peer loans’. Further, quite unlike a bank, the payback scheme is fairly easy. There is no fixed period for repayment of an advance, allowing remittances to rise and fall with a company's sales.
These facets led to leading the money lending industry towards streamlining itself. We are in the process of setting ethical standards and best practices guidelines like disclosure of fees, proper payoffs of balances, and a better sensitivity to merchants' cash flow. These advances tend to appeal to businesses with a high volume of daily debit- and credit-card sales, such as retailers and restaurants. So these merchant cash advances keep the businesses of these owners running strong amidst such severe recession also.
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