Disadvantages of a Merchant Loan

A merchant loan is basically a type of business loan. If you own a business, you likely receive offers for business credit cards with some regularity. These are essentially credit card merchant loans. They are offers to finance your business, even though you may not have necessarily applied. The reason lenders offer these opportunities is because they have a lot to gain through providing you with financing. This means, naturally, that you have a lot to lose if you do not manage that financing correctly.

Business Credit

Your business should develop a credit score and credit history of its own. At first, you will need to provide your personal credit in order for your business to receive financing. You may be able to use the business plan itself to get some investors. However, on the whole, you will be the one holding up the business. Once the business is profitable, it is essential for the business to develop an independent financial identity.

When you use a merchant loan, your business's credit can take a turn in either direction. Just like a personal loan, a commercial loan handled responsibly will build your business's credit. Unfortunately, many businesses are not as responsible with payments. This happens when bills are left to an accounting department or other assistant who is not as on top of the payments. In order to protect your business credit, you need to remain on top of all of your payments and assure nothing is late. 

Over-Leveraging a Business

Part of your business growing and standing on its own is its ability to build assets. Anything your business owns is an asset - buildings, equipment, client accounts and intellectual property included. Building assets will give you the opportunity to attract investors. You will also have the opportunity to publicly list your company or offer it for sale in the future.

When you take on a merchant loan, you are putting your company in debt. A small amount of debt is expected. However, over-leveraging your business can throw your balance sheet into the negative. As a result, you will not gain benefits from your asset base.

Cost of Financing

Financing any purchase will always be more expensive than buying it outright. Your interest rate, especially your annual percentage yield, will make each purchase you make based on the funds you receive through your merchant loan much more expensive. If you purchased these items outright, you would end up spending hundreds or thousand dollars less on each purchase.

It is easy to forget the true cost of financing. Successful businesses will receive offers for low-interest merchant credit cards without even submitting an application. Many spenders end up feeling like this is "free money," immediately extending their ability to spend. However, you will have to make a percentage more in profit each month just to cover the percentage more it cost you to make a purchase. When you factor this out over the years of high-cost purchases your business will make, avoiding loans were possible will always lead you to more savings.