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While merchant loans have been heavily criticized by traditional lenders, they offer a convenient way for small business to obtain the capital they need when banks are turning them down.

While traditional sources of capital are trying to demonize the advance lending industry, claiming that the fess they are charging amount to usury in most states, and may even eclipse the fees traditional mafia related loan sharks would charge. Obviously conventional sources of capital have a vital interest in scaring business owners away from alternative sources of capital

Advance Providers on the other hand say that the service they are offering is different than a traditional loan. Therefore you can’t compare the cost and benefits of a merchant cash advance with a traditional loan. They lend money in return for a share of your future sales. By accepting a fixed share of your future sales rather than agreeing on a fixed monthly payment they share in the risk of your business.

Especially in this hard economic times it is almost impossible for a small business owner to find the capital to keep their business afloat from conventional sources. Let’s assume you own a small retail store and your vendors decided to tighten their credit terms. You find yourself in a sudden need of additional capital to keep your shelves stocked. Banks look at you and they see an increased risk because your financial situation is tighter and most likely they will decline your loan request.

So what are your alternatives? If you would invoice your customers, you could try to find a factoring company and sell your accounts receivables to them for a discount. But as you deal mainly with walk in customers that pay you by credit card, that is not an option for you. This is where the merchant lender comes in.

Based on your credit card sales the lender will determine what portion of your monthly sales can safely be used to pay back the advance. Once they figured out what amount they can lend you, they will determine the fee based on your business’s information.

Now the advance provider wants to make sure that the portion of future credit card sales he is taking of the top is not hurting your business and allows for enough cash flow for you to continue to run your business. Typically he would try to limit his take out to no more than 10% of your monthly sales. In our example that means that you would need to have average monthly sales of $20,000 to cover for the advance.

Now if your business is doing much better because you had access to the working capital you needed, your revenue might increase to $40,000 a month. In this scenario you would still pay 10% of your monthly sales and you would pay back the advance in 6 months rather than 12.

On the other hand if your business slows down because the economy took a nosedive suddenly, your revenue might drop to $5,000 a month. You would still only pay 10% and you would now take 4 years to pay back the advance.

This flexibility and the monthly payments that automatically align themselves with your cash flow is what really make merchant loans attractive loan alternative for small business owners.

If your business needs a financial boost to grow, why not consider taking out a merchant loan? Merchant loans can be used to purchase equipment, expand inventory or any other purpose that will expand your business sphere of influence.