In today’s economy, it can be tricky and challenging for entrepreneurs to qualify for a bank loan. For those who have poor a credit history, taking the traditional route and applying for a loan through a bank may not be the easiest option. Instead, these entrepreneurs who are struggling to attain financing through a bank may consider an alternative option: the merchant cash advance.
What is a merchant cash advance?
A merchant cash advance is a lump sum of cash that a merchant cash advance company will supply to a small business, in return for a percentage of the small business’s daily sales, until the sum of money is completely repaid. The term of a merchant cash advance is usually somewhere between three and eighteen months.
How are merchant cash advances different from bank loans?
Many lending institutions require borrowers, especially those with poor credit history or those who are first-time entrepreneurs, to supply a form of collateral--just in case the borrower becomes unable to repay the loan. Merchant cash advances, however, usually do not require the borrower to supply a form of collateral. As such, merchant cash advances are an option for those with low credit scores or those who simply do not want to risk putting up collateral for a loan.
Banks require regular monthly payments of a predetermined amount. If a payment is missed or is less than the amount that was agreed upon, there might be late fees and other consequences. But merchant cash advances only require a fixed percentage of your business’s sales every day. In other words, the amount you pay back each day to the merchant cash advance provider is directly correlated with the success of your sales that day. So if your small business has a particularly poor few weeks, no worries--you can just pay back less of the merchant cash advance during that period of time. This allows entrepreneurs to better manage their small businesses’ cash flow, especially during months that may be a little slower than usual.
Fast Approval and Payment
Unlike traditional bank loans, merchant cash advances generally supply entrepreneurs with financial backing immediately. Banks can take weeks to process a loan application and determine if the borrower is qualified, but merchant cash advance companies tend to require minimal paperwork and quick responses. For this reason, merchant cash advances are a good option for businesses that require an immediate financial boost--perhaps due to increased demand, or even natural disaster.
High Interest Rates
With all the benefits that merchant cash advances have to offer, there is a caveat: a high interest rate. Merchant cash advance providers operate in a market that is unregulated by the government, so many of these companies charge a hefty interest rate for the finances they provide.
So, what’s better, a merchant cash advance or a bank loan?
This all depends on the borrower’s situation. In many circumstances, the high interest rate can be overlooked because of all the benefits that the merchant cash advance can offer. People who do not have strong credit histories may have trouble applying for a traditional bank loan, in which case they will have more success with a merchant cash advance. People whose small businesses are on shaky ground may also prefer the merchant cash advance due to its more flexible repayment schedule. But entrepreneurs with good credit scores and established businesses will often prefer traditional bank loans, partly due to the much lower interest rate.
In conclusion, merchant cash advances can be great options for many entrepreneurs. They require no collateral, use revenue-based repayment schedules, and provide immediate money to meet entrepreneurs’ financial needs. Just keep the high interest rate in mind.