Going to the bank for a small business loan or line of credit has always been a cumbersome task for any business owner, so most avoid it at all costs unless there is a real or urgent need.
Well, guess who figured out this problem and put data into action? Payment processors.
Virtually every small business uses a payment processing service. Once your company has established cash flow with your payment processor, and they can see how your business performs month-to-month and year-to-year the payment processor may send an offer for “advance on receivables.” Click an accept button, and the money gets deposited to the businesses payment processing account to be used by the business in any way that they choose.
Since this is not a loan, but only an advance on future receivables, the company accepting the advance agrees to have a percentage of each day’s deposits withheld to pay back the advance. If you make $0 in sales one day, then nothing is applied toward the advance. If you make $1000 in sales another day, then the agreed upon percentage is held back from the bank deposit. So, unlike a traditional loan which requires payment on a specific day for the same amount each month, you have a payment plan that works with the ebbs and flows of the company cash flow making it easier to pay back and budget for.
The payment processors typically charge a one-time fee to the business to accept the advance which is then added to the advance amount, and no further costs are involved.
Easy for the business owner and safe for the payment processor as they have control over the flow of money.
The fintech’s are getting smart about how people want to do business, making it easier to run their business and assisting those small business owners who demonstrate day in and day out their cash flow and the growth of their company through their cash flow.
The article below outlines this process in a bit more detail but certainly demonstrates that without innovation, financial institutions stand to lose business bit by bit.