Often, businesses realize that they are not able to meet all their financial obligations regarding maintaining or raising adequate working capital. There are times when a business might even need financing to meet payroll obligations or buy new equipment.
In such cases, business owners have often made traditional financial institutions like commercial banks their first point of call when seeking funding for their business. However, there has been a decline in the overall commercial bank loans to small businesses in particular and business owners have started looking for other alternatives like merchant cash advance.
Why are businesses looking for different sources of funding?
The primary reason why commercial banks reject loan for small business applications is terrible credit. Lenders always look at the credit history of business to establish the financial worthiness of a business. A good credit score shows that the business has been under proper management and that the organization met previous payment on time. A poor credit score shows that the business is not capable of meeting loan agreements and incapable of making a financial decision.
The cash flow of a business is also considered by banks when granting a loan for small business because a stable cash flow determines whether or not the business will be able to meet up with monthly payments. A majority of new businesses do not have a stable cash flow; hence, banks will typically not grant loans to them.
Also, bank loans often require collateral as a form of security; this is another major area that small businesses fail to meet. Meeting with the requirements of collateral is a very daunting task for new businesses and therefore makes securing such loans more difficult.
A merchant cash advance and a loan for small business are both working capital loans. Both help businesses deal with seasonality, meet payroll, expand operations, purchase equipment, etc. Even though both have the same purposes, there are many differences between the two.
What is a Merchant Cash Advance?
A merchant cash advance, or MCA, is a loan where the lender pre-purchases an agreed percentage of your credit card sales. This means that the lender owns a percentage of your future sales until the loan is repaid in full. Unlike other types of loans, MCA has no interest rate and repayment period. In the case of a merchant cash advance, the lender considers more about the business’s credit card sales that other metrics.
This percentage is called the holdback percentage and is consistent throughout the duration of the MCA. But, since credit card receipts and the daily amount you repay differs on a daily basis, there is no fixed due date for paying back the advance. Usually, most advances are paid between four to 12 months.
Advantages of Merchant Cash Advance
No credit or collateral is needed for the loan
A merchant cash advance is an alternative source of finance for business. While other traditional loans affect the company’s credit rating, an MCA takes a percentage of the company’s credit card sales and therefore stays away from its credit report. MCA also does not involve collateral, a common trait in a traditional loan system.
Easy application and collection process
Applying for a merchant cash advance loan is an easy method. While traditional loans evaluate a business’s credit reports, financial statements, and tax returns, merchant cash advance lenders only look at the length of the business time and the monthly credit card receipt before handing over the funding.
Quick access to capital
Access to cash is quick because MCA loans have the minimum paperwork. Traditional loans may take up to weeks or months to get the loan processed duly; MCA loans can be made available within a week’s time.
What is a loan for small business?
Loan for small business are funds that are given to small or new businesses that must be repaid with interest. Banks have been the primary source for small business loans all over the world. Borrowing from a bank can be a good option for small businesses if they can meet the potentially rigid qualification criteria.
Even after meeting with all the requirements for a loan like sufficient collateral and right credit scores, a bank loan might not be the best loan to address your situation; hence, you might need to understand and investigate all your options to pick the right loan for small business.
- Fixed and low and interest rates
- Fixed monthly payments
- Professional banker relationship
- Available for many uses
- Can help build business credit
- Requires collateral
- Requires a strong credit
- Longer waiting time
- Lengthy paperwork
How does MCA compare with a loan for small business?
Nature of terms
The terms of an MCA transaction is not usually fixed. For example, the duration of the loan is not fixed and varies, depending on the volume of credit card sales. However, in the case of a loan for small business, the amount is expected to be repaid within a set of the agreed time. Failure to do so can bring consequences and can cause the business to file for bankruptcy, thereby affecting the credit score.
Documentation and timeliness
Processing an MCA loan can take a few business days, provided the business has met all the requirements. It takes less amount of days to secure an MCA loan because of the minimum amount of paperwork that is required for the advance to be processed.
However, when it comes to loan for small business, it might take weeks or even months to get the loan processed. In some cases, the request for a loan might also be rejected, even after waiting for so long; on the contrary, the chance of an MCA application getting granted is much higher than of a loan for small business.
A merchant cash advance is a better choice than loans, especially for small businesses that are in urgent need of financial funding. The only objection to MCAs is because of its relative cost; but, judging by its many highs, MCAs compensates more than enough for its cost. If a new business is looking for a reliable source of funding, they should always consider merchant cash advances first.