If your small business accepts American Express credit cards and performs consistent debit and credit transactions, American Express Merchant Financing seems like a very sensible source of funding. The program is basically a cheaper version of a merchant cash advance, making it an ideal choice for both short and long-term investments. You’ve gone over the general requirements and determined you fulfill each one. But a few days after filing your application, you find out American Express is just like every other business lender: You think you have what it takes to qualify until your application is rejected.
Getting rejected for this particular program is especially painful because it is so affordable. But this minor setback does not mean you will not be able to qualify for a similarly (if not more) convenient option from another business lender. In this comprehensive guide, we’ll go over every step to take following your denial, which includes choosing another option that perfectly suits your needs.
Step 1: Find Out Why You Were Rejected
Regardless of which business lender has issued your rejection, the first step is always to find out why you were rejected. The most plausible reason is that, based on American Express’s standards, your business’s cash flow is not strong enough to pay off the debt via their repayment system while simultaneously covering regular business expenses. Prior to filling out an application, you might have researched the repayment structure of a traditional merchant cash advance and thought “I could pay off a loan that way, no problem.” And since American Express Merchant Financing is even cheaper than a merchant cash advance, you didn’t think about the possibility of other factors that might render you ineligible.
This may very well have been the primary reason you were rejected. If you look a little deeper into eligibility for American Express Merchant Financing, you’ll discover that in some cases, it can actually be harder to qualify for this program than a traditional merchant cash advance.
Here are a few factors that would likely make you ineligible for the former, but not the latter:
- Credit Score
Most other business lenders will not deny based solely on your personal credit score when applying for a merchant cash advance. This is because the decision is based on future debit and credit card transactions, as opposed to your past. But as similar as the two programs appear to be, American Express Merchant Financing and a merchant cash advance are not identical. A merchant cash advance, for example, is not technically classified as a “loan.” Rather than loaning you money, the business lender is purchasing the right to collect on your future debit and credit card receivables. American Express Merchant Financing, on the other hand, is technically classified as a loan. If that sounds confusing, it’s because it is.
So, just like almost every other small business loan, credit score is a major factor when determining eligibility. If your credit score is not flawless or close to it, it might be very difficult to be approved.
Just like credit score, the ability to provide a collateral is a major factor when determining eligibility for a traditional small business loan. In the case of American Express Merchant Financing, you must not only provide collateral but that collateral cannot be real estate or motor vehicles. That leaves you with just one option: extremely expensive business equipment. If your business does not have assets worth as much as your desired loan, there’s no point in applying for American Express Merchant Financing.
- Inability To Fulfill Repayment Schedule
You’ve got your credit check, collateral…what’s missing? That’s right, a required payment schedule. Even though American Express Merchant Financing is repaid via a percentage of debit and credit card transactions (like a merchant cash advance), it does not carry the same terms as a merchant cash advance. Most merchant cash advance products do not have due dates. You can take as long as you want to pay off the balance. With American Express Merchant Financing, you must be able to fulfill a repayment schedule, or pay back a certain amount of money within a certain time frame. There’s a decent chance that if you were rejected for American Express Merchant Financing, it’s because your cash flow was deemed unable to fulfill the repayment schedule that would have automatically been assigned to your desired amount.
- Industry Discrimination
A traditional merchant cash advance is available for just about any business that performs consistent debit and/or credit card transactions, with rare exceptions. American Express Merchant Financing, on the other hand, is only available for certain types of businesses. The service’s website doesn’t specify which ones but according to NerdWallet, businesses in the restaurant, retail and lodging industries make up the majority of American Express Merchant Financing borrowers. If American Express is like most other business lenders, applicants who are not among their most funded industries must compensate by demonstrating excellent cash flow and capitalization, or clearly surpassing the service’s annual revenue or credit receivables requirements. Failing to fulfill the first or second part of that equation could likely severely decrease your chances of approval.
Step 2: Explore Other Options
You are now left with at least two choices for your next move: you could make some changes to your business that may improve your chances of approval for American Express Merchant Financing or explore other options. If you choose the latter, you could research other business lenders that offer programs that are very similar to American Express Merchant Financing. Or, you could look into programs that are just slightly similar.
Here are three programs that are very similar to American Express Merchant Financing:
- PayPal Working Capital: This is only available to subscribers of PayPal Premier or PayPal Business for at least three months. You are given a lump sum that is paid off via a percentage of daily sales that go towards the borrower’s PayPal account. The percentage is based on the amount borrowed, which is based on your PayPal sales history. Once you are approved, you are presented a series of daily repayment rates to choose from. But no matter which rate you select, the amount must be paid back in full within 18 months. There are no period periodic interest charges, late fees, pre-payment fees, and penalty fees for PayPal Working Capital.
- Square Capital: Square Capital’s “Flex Loan” is only available to businesses that use the Square Capital point-of-sale product. The lump sum is paid off via a percentage of daily debit and credit card sales and must be paid back in full within 18 months. You must be able to pay at least one-eighteenth of your total amount every 60 days.
- United Capital Source Merchant Cash Advance: Imagine the Flex Loan, only you don’t have to use Square Capital, and you don’t have to be able to pay one-eighteenth of your total every 60 days. Payments can also be made on whichever frequency you batch out your debit and credit card transactions (weekly, monthly, etc).
- United Capital Source Revenue Based Business Loan (Business Cash Advance): Similar to our MCA but your payments are deducted via a fixed percentage of your entire monthly revenue.
Step 3: Other Factors To Take Into Account
Two things all of the four aforementioned programs have in common is that neither of them require collateral or a perfect personal credit score. Your annual revenue must exceed $100,000 for all programs but PayPal, where borrowers must process at least $20,000 in annual sales for PayPal Premier or $15,000 in annual sales for PayPal Business. Neither business lender is known for discriminating against any industry. PayPal and Square Capital reportedly do not have requirements for time in business, though you must be in business for at least six months in order to be approved by United Capital Source.
- Interest vs Repayment System
Much like American Express Merchant Financing, interest rates for PayPal Working Capital and Square Capital’s Flex Loan are among the lowest on the market. But this is because their terms demand that you repay a certain amount within a certain time frame. These terms are also non-negotiable, and likely cannot be adjusted in the event of an uncontrollable circumstance. Interest rates for United Capital Source are higher but it doesn’t matter how much money you pay per month as long as you pay off the debt in full by the assigned due date.
And unlike PayPal and Square Capital, United Capital Source’s business loans are overseen by living, breathing human beings, as opposed to a computer algorithm. So, if your business experiences an unexpected crisis, we are able to alter your terms to prevent repayments from obstructing cash flow or inhibiting your ability to cover regular business expenses.
The Final Step
As convenient as American Express Merchant Financing seems to be, it is not your only shot at highly advantageous terms for an appropriate cost. Your rejection is also not a universal confirmation that your cash flow is too unstable to work with, nor does it have to subject you to an unfairly restrictive repayment system. In many cases, a rejection only means you have to find a business lender or program that offers a different repayment system and more experience with your industry.
But before you go ahead and apply to another business lender, take a good look at your monthly financials and see if there’s any areas where you can improve. Odds are, you’ll find at least one expense that can be cut or one revenue-generating activity that deserves more attention. Eliminating as many flaws in your cash flow as possible will essentially seal your approval the next time around.