Merchant Cash Advance Blog

Loans for Small Business Owners Through Merchant Cash Advance

   Friday, 12 January 2018 05:15 PBC Blog

Loans for Small Business Owners Through Merchant Cash Advance

That business of all kinds will at one point or the other require financial assistance of some sort cannot be disputed. And the approach a business utilizes in securing the much-needed funding will depend on the nature of the business, the amount of funding required, and the purpose for which the loan or whatever credit facility that is required. Loans for small business owners come in different shades but are generally obtained for almost the same reasons.  For instance it is often the case that businesses have to purchase real estate in order to expand their operations and might not have the fund required to do that. Firms usually want to expand when they are turning a profit with a positive cash flow and are optimistic that expansion would bring even bigger profit. Real estate loans often come in the form of mortgage, involve the use of collateral and paid over a period of 20 to 30 years. However loans for small business owners are usually not mortgage loans for those for the purpose of equipment purchase, inventory purchase, increase of working capital, and in some cases to offset existing debt. For the case of equipment financing, small businesses have to choose between actually purchasing the equipment and leasing it. The reason why businesses might wish to take a loan to purchase equipment is sometimes that of certain benefits that come from doing so. For instance, the business can take a tax write off of about $25000 for the first and then proceed to depreciate the rest of the equipment over the rest of its economic life.  


On the other hand loans for the purpose of inventory are usually offered to a business which is seasonal in nature, particularly retail business. If for instance, a business makes the bulk of its sales during festive periods it would find it quite profitable purchasing its inventory prior to that time. So a business which is seasonal could obtain a loan from a commercial bank or any other source to buy inventory before that time and repay the financing from proceeds of its sale during the festive period. Such loans are short-term loans and as a result, could have considerably higher interest rates. Loans for small business owners which are however obtained for the purpose of increasing working capital are also short-term loans. Such loans are used to finance the day to day operations of the business until such a time when the earning assets of the business are sufficient to meet its working capital needs. Working capital loans can also be issued to a business in order to get off the ground and grow. But because working capital loans are considered to be much riskier, interest rates might be higher than those of, say, mortgage.


Read More:
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Top Sources of Loans for small business owners


Online business loans

One of the most popular sources of loans for small business owners is through online lenders.  Over the last couple of decades, online business loans have become increasingly popular, corresponding with the general decline in bank lending to small businesses. This is something to be really considered since, according to a Harvard study, as far back as 1995 loans to small businesses made about 50 percent of entire bank loans; however, the figure had dropped to a little above 30 percent in 2012. Online lenders, which are rising to fill the gap this has created, make use of complex algorithms and technology to analyze credit score and cash flow in order to determine the creditworthiness of the business. As a source of loans for small business owners, online lenders see the need to provide quick access to cash that can be obtained from traditional lenders. Online lenders are not exactly for all kinds of businesses. For instance, startups are not eligible for online loans, while a business which has been in operation for more than one year, can always explore the option of online lending if it does not qualify for a traditional bank loan


Invoice Factoring

Loans for small business owners can also be obtained through invoice factoring. Invoice factoring is a loan transaction in which a business borrows money against its unpaid customer invoices. It is a way to get quick cash while waiting for owing customers to pay up. Invoice factoring bears so much similarity with a variant in which what is offered as a form of guarantee for the loan is not unpaid invoice; rather the business offers the debt is being owed. In this other scenario, the factoring company is empowered to collect the loan and give back about 90 percent of the amount it recovers for the business as the case might be. Invoice factoring, however, is suited for businesses that sell goods and services to other businesses since that is the only way there can be an invoice in the first place. Factoring also costs than term loans and even business lines of credit. In a nutshell, businesses which have been in operation for at least 3 months with bad credit scores, but having strong credit customers can qualify for as much as 2.5 million dollars’ worth of loans for small business owners, having an annual percentage rate of between 15 to 75 %.


Term Loans

It has already been stated that term loans from commercial banks have prior to our present time being the leading source of loans for small business owners. The main reason why bank loans have been attractive to small business is because of the small interests that are charged, of course, that is in comparison to what obtains from other sources. Loans from commercial banks are also often extended over longer periods. Moreover, banks are the ones have the financial strength to offer much more as most loans from nontraditional sources such as merchant cash advance have limits way below those of commercial banks. In spite of the seeming advantages of commercial bank loans, it is losing its place as the number one choice of those who seek loans for small business owners. In fact, one study found that more than 40 percent of small business owners did not even bother contacting banks for their financial needs. And the reason has to with the high rate if rejection faced by loan applications made by small business owners to commercial banks. Much of the reason for the rejection also has to do with the fact these businesses rarely ever meets the full requirements for obtaining commercial bank loans. Chief among the hindrance to small businesses is the issue of collateral which small businesses more often than not are unable to provide. There is also the requirement of good credit score and strong cash flow before loans can be granted to a business. All these difficulties have made small businesses over time turn to nontraditional sources for business funding.

Read More:Merchant Cash Advance and the Quest for Alternative Business Finance


Merchant Cash Advance

Merchant cash advance is widely regarded as one of the leading sources of loans for small business owners in the world of non-traditional lenders. A merchant cash advance differs significantly from a loan in a number of ways. First, it does not possess the major characteristic of commercial bank loans: fixed terms. In a merchant cash advance transaction there are no fixed terms in that there is no agreed time frame for the repayment of the loan. There is no virtually no such thing as early and late payments, neither are there are penalties attached to default in payment schedule as obtains with commercial bank loans. The merchant cash industry is also a largely unregulated one. This means that there is government oversight on the operations of merchant cash advance providers. In short merchant cash advance is regarded as a business to business transaction and as such laws that apply to business to customer relations do not apply. This is not to say tar everything goes in an MCA transaction since such laws such as the fair credit reporting act and the uniform commercial code applies to obtaining loans for small business owners through merchant cash advance providers. To be clear, in a merchant cash advance transaction a business agrees to give the merchant cash advance provider a portion of its daily credit card sales in exchange for a lump sum of cash which can be obtained almost immediately. The advance is multiplied by a given factor to arrive at the total amount the business pays back. A fixed portion of the daily credit sales of the business is then committed to paying the advance till the whole amount has been repaid and then the merchant cash advance provider loses its right over the receivables of the business. There are obvious benefits to obtaining loans for small business owners through merchant cash advance. Chief among these benefits it’s the enormous amount of time it saves the business. While a loan from other sources could take weeks to process, a merchant cash advance can often be processed in a few days once the business meets the individual requirement of the provider. The other major benefit is that loans so to speak from MCA are unsecured. The business stands to lose nothing if it is unable to redeem the loan. And most significantly, MCA providers do not require a good credit score before an advance is issued; instead, they simply require for the businesses to have minimum monthly revenue of about $10,000.


Conclusion

Unlike loans from other sources, the approval rate of merchant cash advance is in the neighborhood of 90 percent. This combined with the minimal documentation and the speed involved makes it ideal for small businesses. Resorting to MCA providers to obtain loans for small business owners have almost always found it rewarding.

 

 

We provide two highly accessible financing programs that can get your business the working capital it needs in days instead of months.

For a small business, obtaining a traditional loan today is a complex and difficult process. That’s where Premier Business Capital comes in. 

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