As we all know, businesses can’t run for a long term without the presence of sufficient cash flow. Sufficient cash flow is one of the key elements to a fully-functioning business that runs smoothly. Without the working capital and sufficient cash flow, you will be putting your business at the mercy of not being able to pay bills.
For various companies looking for working capital, one of the prominent sources of funding is merchant cash advances. Banks and conventional lenders have been shying away from lending money to small businesses- for over a decade or so. As the gap appeared a new type of alternative lenders stepped in to fill in the void of funding small businesses and more.
Unlike conventional lenders, MCA lenders can give a green flag to small businesses for funds- within a few days. However, fast funding comes at a great price. The merchant cash advances offer to finance a business in exchange for higher rates than other business funding services. Besides the high rates, the MCA company can charge substantial fees and serve only for short period. With additional costs and the short term, it is stressful for any company’s financial health. That’s the reason, experts always recommend trying alternatives to merchant cash advances first. From this perspective, merchant cash advances are more like the last resort for financing a business if other areas fail.
Merchant cash advance or business cash advance is ideally a sale of another company’s succeeding receivables at a discount to a funding company (mostly small business). We can’t consider merchant cash advances as loans- because it is not. There’s an involvement of the company’s future receivables, for which we can technically call this a B2B transaction.
There’s a stark difference between the approval of a cash advance and its underwriting process with traditional lenders. Cash advance companies run only a basic credit check and monitor bank statements for a few months before arriving at a decision. If there are no discrepancies they will immediately approve and provide financial aid to the business. After the offer is settled with the business, the cash advance company sends a contract (also some additional stipulations) to seal the deal. Following that, the signed contract and the stipulated documents go to the funding MCA company. As the company receives the signed contract, they deposit the funds to the business account and commence the repayment process from the next business day.
Fast Funding
When the approval process of obtaining a merchant cash advance completes within a few hours, why won’t you choose MCA over other financing possibilities? After the approval process, it takes hardly a day or two for funds to be deposited into the company’s account.
Bad Credit OK
With bad credit history, you are not likely to get business funding. But a merchant cash advance funder won’t budge even with poor credit history. The best thing is merchant cash advance lenders are ready to finance the business owners with a credit score- as low as 500. Even if the business owners have business or personal tax liens, the MCA lenders still provide finance for the business.
Access to Additional Funds
After receiving a cash advance, if a small business can repay a portion of the sum- the funding company will give access to additional funds for the business. Most of the MCA lenders provide additional funds to merchants who have already paid back at least 50% of their advance.
High Rates
In the business financing sector, merchant cash advance demands the highest rates among other options. Unlike the loan, the merchant cash advance doesn’t get calculated using an APR. The interest rate for merchant cash advance lenders is calculated by a factor rate – a multiple of the loan including the interest rate.
The typical MCA has factor rates that can range between 1.10-1.50. For example, if the MCA is $20,000, the small business would have to pay back $20,000 x 1.10-1.50 (i.e. $22,000- $30,000).
Short Terms
Besides the high rates on cash advances, the terms are also limited for merchant cash advance financing. Especially if we compare it with a bank loan or SBA loan. You will come across many MCA lenders who advertise or claim to give terms ranging up to 2 years. But only a few MCA lenders offer 24 months (2 years) terms.
Typically, a cash advance has a term between 4-12 months. If we calculate the actual APR of the cash advance during the short term, it can get over 100%. Therefore, a short term keeps you on your toes even with good cash flow.
High Fees
The super high rates of cash advance are already bad for a business owner. Upon that, the cash advance lender may wish to charge unreasonably high fees for funding the merchant. Some cash advance lenders charge $395 as a processing fee- but others may charge a percentage (up to 10%) on the total funding amount. Making the total payback amount way higher than usual.
Stress on Cash-Flow
Even if you ignore the high rates, short terms, and high fees, there’s something else that can trigger stress with MCA. The merchant is expected to make regular payments after getting the fund. Either, they have to use the ACH payment method where the transaction happens directly from the company’s bank accounts, or the merchant has to split the merchant credit card processing sales with the MCA funding company every day. When it comes to daily payments, it can press the stress alarm on the company’s cash flow. The pressure can lead the business to obtain additional position cash advances.
SBA Loans
When companies are seeking long-term, low rates, and small fees to finance their businesses- SBA loans are often an ideal choice. As this conventional financing alternative offers SBA loan guarantee enhancement, conventional lenders take advantage of it.
The guarantee enhancement bestows power to the lenders- if the borrower is unable to repay the complete loan, the government can step in. The government will cover a certain amount of SBA lender’s losses.
As the rates start at 6% with up to 25 years term, nothing can beat an SBA loan as an alternative to merchant cash advance.
Bank Loans
Without any doubt- getting loans from a conventional bank is the best option to finance your small business. Most organizations understand this and choose to stick to the conventional model.
Then why not all businesses choose the best option available for them? The issue with many businesses is meeting the high standards of these conventional lenders. However, when you are ready to meet the requirements, a conventional bank loan is the ideal alternative to a merchant cash advance.
Asset Based Loans
Some companies may have issues with obtaining conventional financing and don’t want an unsecured merchant cash advance. What will they do to finance their business? Here’s the solution- if a company has substantial asset value, it can use those assets as collateral to finance the business.
As an alternative to a merchant cash advance, asset-based loans are different and reduce lenders’ risk exposure. So, the lenders are willing to lend you cash at lower rates benefiting both parties.
Private Investment Loans
If you want private investment loans, some investors or non-bank institutional lenders can come to your aid. These lenders or investors look for a return by offering debt finance to any growing small businesses. Also, they lend their money to some businesses that are burdened by substantial debt and would like to integrate all their cash advances into a single unit of financing product. Due to the longer terms for money return and affordability, private investment loans are a favorite with many businesses.
Invoice Factoring
Do you have a big number ( at least 30-90) of unpaid invoices from another business at your company? Did you know- you can get immediate cash by selling those invoices?
Also, with invoice factoring, you can get funded even within 24 hours if not less. Because of the funding speed and affordability, invoice factoring is an excellent alternative to merchant cash advances.
Equipment Leasing
During the time of emergency, you can choose to take an equipment lease, instead of taking a Merchant Cash Advance. After all, the affordability rate of the equipment lease is higher.
Here’s what happens when you choose to take the lease: the leasing company will invest in the equipment for your business. So, your business will get the equipment on a lease- for a period of time. As terms for equipment leasing are longer and you have to pay monthly- it is indeed a great alternative to merchant cash advance.
It is always recommended to research various financing options available in the market. Each of the business financing options comes with respective pros and cons. Depending on your scenario and requirements you can opt for one. However, you can always reach out to specialists who can help you find the right alternatives to merchant cash advances for your business funding.
