Standards for cash advance qualification are much more relaxed than lending standards for bank loans, but a provider will still need to evaluate to some degree the level of risk your business presents. In business cash advance transactions, there is no loan contract and no collateral securing the loan. This means that a provider bears the bulk of the risk in the transaction.
Because providers are repaid only as your business generates income, most vendors tend to evaluate future profitability rather than past credit history or sales. It is in a providers’ best interest to see your business profit and thrive, so providers are not likely to impose onerous repayment terms for most transactions.
Merchant advance providers usually provide advances to businesses with a reliable sales history, a stable sales volume, and plans for growth in the future. If you go out of business, the provider doesn’t get paid back. Most of the things a provider looks for in a qualifying business indicate that the business has a long-range business plan.
For example, most providers consider:
- Monthly Credit Card Sales
Some providers will work only with businesses that have at least several thousand dollars in volume as credit card transactions. As an assurance of repayment, providers often charge extra fees or are allowed to demand full repayment if monthly credit card sales decline below a pre-determined number.
- Other Financial Obligations
A provider will take into account other obligations when evaluating the financial record of a business. Outstanding debts, liens, and loans in default are all indications that a business may “fold” or shut down operations. Providers specifically look for existing cash advance agreements. Most will not advance to businesses that have existing agreements with other companies.
- Equipment and Property Leases
Some providers will require an existing property lease that expires in a year or more, or equipment contracts for machinery, vehicles, or computer equipment. Again, these are all indications that your business will remain operating long enough to be able to repay the debt.
The requirements for a cash advance or factoring service transaction are not as strict as the requirements for traditional financing would be. In some cases, providers require additional qualifications as a condition of approval. For example, by requiring that your business has been operating for at least a year at the time of the advance. Some will require past credit card receipts and sales records. Providers are looking for every indication that your business is a stable, reliable investment. In addition, some providers will also require a detailed plan for how the advance amount will be spent. Some request receipts, pay stubs, and other documentation as a condition for further agreements.
A cash advance is similar to a loan in that factors that indicate risk are evaluated and used to determine fees. Established businesses, or those that have invested in equipment, real estate, or other property are lower risk, because they have investments to protect. Start ups, new businesses, or those that are already experiencing financial difficulty are higher risk, and will generally end up paying higher rates to qualify for an advance.