The reluctance on behalf of commercial banks to issue loans to small businesses has led business owners to question whether bank loans are really what they have to depend on in this time and age. This comes at a time when small businesses are still grappling with the effect of the most recent economic downturn, even though the country managed to pull through. At present, business owners have become so skeptical of commercial banks that it has been found that a significant proportion does not even bother applying to commercial banks for business funding; instead, they have opted for alternative lending sources such as merchant cash advance lenders who provide a MCA loan to businesses in dire need of cash. How much small businesses in particular need business funding cannot really be overemphasized. For one thing, cash flow problem has been identified as one of the leading cause of business failure. A growing number of small businesses now find it quite difficult staying past ten years. It has been revealed that somewhere around 60 percent of small businesses fail within the first ten years. If one is to consider the fact that small businesses account for a little more than 50 percent of employment in the country, with one in every three new job creation coming from the small business sector, then it is easy to see just why small businesses should have read access to small business finance.
A MCA loan is one way through which businesses can ensure that working capital is always available when needed. Being that a merchant cash advance is representative of the alternative finance industry, there have been some objections to it based on cost. Some have even claimed that a merchant cash advance is likely the most expensive financial service currently in the market. Obviously, this is an exaggeration, one that, however, needs to be addressed. Most people who claim that a MCA loan is relatively more expensive often fail to consider whether or not the cost of a merchant cash advance is justifiable. Being that it is the norm for commercial banks to charge interest on a loan based on the level of risk it considers itself to be taking, it is expected that merchant cash advance providers should a somewhat higher price the risk in a merchant cash advance transaction is maximum for the lender and can be said to be zero for the merchant. This is because merchants do not provide any form of security for the loan they obtain, be it in the form of collateral or personal guarantee. Having said that it is time to consider what a MCA loan is in detail and how it is a much better option than commercial bank loans in several situations.
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What is a Merchant Loan and how does it differ from commercial Bank Loan?
The first thing a business owner has to know about a MCA loan is that it cannot be thought of in the same sense as a loan from a commercial bank. For one thing, a merchant cash advance does not have fixed terms. This to say that unlike commercial bank loans where the payment period is fixed and where the merchant can be punished if he defaults, there is no fixed repayment period for a merchant cash advance. The reason is that a merchant cash advance is a commercial transaction in which a business sells its future receivables to a merchant cash advance provider; as such payment is paid on a daily basis rather than on a monthly basis to the lender based on a predetermined percentage of the daily credit card sales. From this, it can be deduced that even if the MCA loan provider estimates that the loan would be repaid in about 12 months—and this typical-it might not eventually be the case. For it is quite common for sales levels to drop far below what is being anticipated. In essence the time it would take to repay a merchant cash advance cannot be accurately known by either the business or the lender in advance. Although, this might at first seem like an issue, however, when considered from the angle of the business which is only made to pay in proportion to its credit card sales, one finds that this is something that is quite advantageous since it ensures that significant strain is not placed on cash flow.
Because a MCA loan is essentially a sale, it is not subject to conventional usury laws that govern commercial bank loans. Nor are merchant vendors subject to governmental regulations of some sort. Neither the factor rate nor the retrieval rate associated with merchant advance is being regulated by the government, even there have been calls for the industry to be regulated. This is not suggesting that the merchant cash advance industry is somewhat disorderly. Indeed, such laws as the uniform commercial code in each state and the fair credit reporting act all govern merchant cash advance transactions. In addition to those, top MCA loan providers are looking forward to having some conventions which merchant vendors could adopt, even though it would not be mandatory for an individual provider to do so. In a nutshell, a merchant loan is suited for businesses that fulfill the vast majority of their business transactions using credit cards such as MasterCard and Visa. Such businesses must also be generating significant monthly revenue and have a physical location. Any business fulfilling these minor criteria becomes eligible for an advance and there are benefits for opting for an MCA loan instead of the usual bank loans.
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Benefits of Merchant Cash Advance
One of the most important benefits of merchant cash advance is that business funding is obtained very quickly, sometimes in a matter of hours. This is in contrast to what obtains with commercial bank loans where a business has to wait for several weeks or months before obtaining a loan, that is if it is granted in the first place since rejection is most likely to follow. Businesses insisting on an MCA loan do not have to worry about credit scores as merchant vendors do not base their decisions on it. Above all, since the approval rate of merchant cash advance is more than 90 percent, it is something that a business can rely on when in dire need of cash.