One of the major obstacles facing small and medium scale businesses has to with obtaining loans from commercial banks owing to the high standards set by commercial banks for loans. Obtaining loans from non-traditional sources has become the latest option for business owners. Small business loans can be obtained from a large number of traditional and alternative sources. But before exploring how to get a business loan a firm must and foremost be clear on why it needs the loan since financial institutions require this information and can even base their decisions on the purpose of the loan if other conditions have been satisfied. In this regard most business owners will likely find that the reason for a loan will often be either for the purpose of managing the day to day expenses, to grow or expand the business, to have safety cushion, or even to repay debts emanating from previous loans.
Determining the kind of loan that the business needs
The next thing a business needs to be clear on is the kind of loan they’ll be obtaining. This is very crucial to obtaining a business fund which does not fit in with key business objectives can, in the long run, prove fatal for the business. And, of course, the purpose of the loan—whether it is short term or long term—will also play a major role helping the business decide what kind of funding it needs. One of the things to keep in mind regardless of what kind of loan a business wishes to obtain is that it will be almost impossible to get a loan if the business is in its first year. This is because financial institutions will require cash flow information to determine if the business has the wherewithal to repay the loan. The implication of this is that startups will have to look particularly to bootstrap financing, crowdfunding, personal loans, or micro loans from non profit lenders. This is to say that knowing how to get a business loan means understanding the kind of institutions to approach for different kinds of loans.
Comparing the major sources of business loans
It has even been suggested that businesses take the process of seeking loans to be somewhat like shopping around for a car. Once a decision has been reached on the kind of finance and lender that is needed, business owners are often advised to compare and contrast similar options with a view to determining the one which would be most effective. In most case, it is suggested that a business should go for the option which makes for the lowest annual percentage rate which is a measure of the true cost of the loan. How to get a business loan from a number of sources such as banks, microlenders, and online lenders and, much later, merchant cash advance providers shall be discussed. For banks, a good credit score ranging from 650 and above often means that the business has a good chance of securing the loan. But we must not forget that providing sufficient collateral is also a core requirement for commercial bank loans. Banks can provide term loans, lines of credit, as well as commercial mortgages, to businesses.
Why bank loans might not be ideal for a small business
In spite of what banks promise in terms of commercial loans with low annual percentage rates, it is becoming increasingly difficult for small business to get funds from banks. This is due to the lower sales volume and cash reserves which they have. The situation is even made more difficult because small firms will find it extremely difficult to come with the collaterals which commercial banks demand. Moreover, commercial bank loans are not really ideal for a business in urgent need of cash. So, small businesses in need of cash might have to turn to other sources.
The good and not too good aspect of microlending
Microlenders become the next point of call when a business is denied access to loans because of the seemingly small size of the business. Microlenders typically issue short-term loans that are below $35000, and are geared to making profit—microlenders are nonprofits. But microlenders require a detailed business plan, elaborate financial statements, and clear description of what the loan is intended for. All this makes the process quite a rigorous one. One more thing: microlenders do not request collaterals and work with businesses with poor personal credits. Although, it seems that once one knows how to get a business loan from microlenders all problems are solved. This is far from the truth since most business owners know too well that their financial needs will often exceed the limit of the microlenders, thus creating the need for other avenues to be explored.
Understanding what merchant cash advance is all about
If after exploring the aforementioned options and a business still finds that it’s still battling with how to get a business loan, then it should look no further than a merchant cash advance. A merchant cash advance can be thought of as the sale of firm`s future credit sales in exchange for a lump sum of cash up front. A merchant cash advance connotes the payment of a fraction of the business sales that come through credit and debit cards to the merchant cash advance provider on a daily basis. A merchant cash advance is not a loan even though it essentially functions as one. The most prominent thing that distinguishes a cash advance from a loan is that there are no fixed terms. The period over which the advance has to be repaid is not fixed and there is no such thing as a penalty arising from late payments as obtains in loans from traditional institutions. In fact, several court rulings have served to establish a merchant cash advance a sale, and, therefore not affected by laws that govern loans. This is to say that the entire merchant cash advance industry is unregulated and as such not subject to federal oversight.
What qualifies a business for a merchant cash advance?
Before we delve into the process of how to obtain a business loan from merchant cash advance providers, we first need to take a look at what criteria there are for a business to obtain a cash advance. First, most merchant providers will often make it a core requirement for the business to have been in operation for a period of at least 1 year (some firms even make it as low as nine months). Another usual requirement is for the business to have a physical location; that is to say, those online based businesses are generally excluded from a merchant cash advance except under compelling circumstances. In addition, the business seeking the advance must accept visa and mastercard payments and process a large volume of credit card sales a month—not less than $5000 a month. Once these requirements have been met—barring such things as external debt—it is highly likely that a business will get a merchant cash advance.
The basic process of obtaining a merchant cash advance
The process of how to obtain a business loan from merchant cash providers is quite a simple one. The first step is for the business owner to obtain and then proceed to fill the merchant cash advance application form. The application will typically demand details of the total credit card sales of the business in a month and the mode of receiving such payments. A few documents such as proof of insurance and federal tax identification number might be required to reassure the merchant provider of the identity of the business owners. Once the application has been completed, submitted, and reviewed, the merchant providers will often send a representative to discuss the terms which best suits the individual business. Unlike commercial bank loans, the likelihood of approval is exceedingly high with merchant cash advances.
How does the whole thing work?
Knowing how to obtain a business loan through merchant cash advance is one thing; knowing how it works is another thing. When merchant requests a sum from a merchant provider, the latter usually multiplies the sum by a given factor that does not often exceed 1.5. This factoring yields the total amount that is to be repaid by the merchant. The merchant also agrees to the merchant agreement that is signed that a fixed percentage or amount of the daily credit sales of the business is to be remitted to the merchant provider. This process of remitting funds continues until the cash advance has been fully repaid and afterward, the merchant provider loses its entitlement to the future receivables of the business.
Benefits of using merchant cash advance
There are lots benefits that come with understanding how to get a business loan from merchant vendors. The first is that cash is obtained quickly after a stress-free process. There is also no risk of a personal loss in a merchant cash advance as the merchant cash provider bears all the risks and suffers loss if the business happens to fail. Meanwhile, a low credit score does not disqualify a business from getting a cash advance. Merchant cash advance, therefore, remains a veritable source of business funding for small businesses.
Now that you know how a Merchant cash advance works, consider trying one out today by filling out a quick online application. You are only moments away from obtaining the funds you need to take your business to the next level!