Small businesses are not often able to come with funds required for important business activities without resorting to lenders of all sorts of financial assistance in the form of loans. Obtaining business funding is not as simple as it might appear to someone who is outside of the business domain. Indeed finding a good source of business funding is one of the most significant challenges facing small businesses in our time. Both secured and unsecured loans seemed to be out of the reach of business owners until very recently when merchant cash advance providers entered the scene. Even now it is still a bit of challenge for a business to choose the lending option that best suits it. Before taking a look at merchant cash advance which is fast becoming the number one source of funding for small businesses, it is important that we take a look at some of the options that business has at its disposal at this moment time. The goal, of course, is to show how it is that unsecured loans from merchant cash advance providers are a better option when it comes to the issue of providing funds to businesses that in dire need of cash.
How Merchant Cash Advance Compares With Term Loans
The first option that comes to the mind of the average business owner that is in need of funding is term loan. The main reason term loans come to mind is because they are cheaper when compared to other funding options, and also because the payment of term loans is spread across a more extended period than almost any other financing option. In spite of these advantages, small business owners seem to lean towards unsecured loans such as those offered by merchant cash advance providers for two main reasons. The first is that small businesses often find it difficult to provide sufficient collateral needed to obtain the funding they require. The second is that most small businesses are known to have credit scores that are too far below that which is required by commercial banks. For these reasons only a handful of small businesses can access funds from banks, and the number that can do this drops each year.
Perhaps merchant cash vendors came up with the idea of unsecured loans in a bid to tackle these two problems. The first problem of collateral does not come up in a merchant cash advance transaction since collaterals are not required, nor are personal guarantees. It means that all those small businesses that might have been denied access to funding on account of insufficient can confidently look to merchant cash advance providers. The other problem of credit score is also efficiently addressed by merchant lenders. To obtain unsecured loans, a merchant needs to have a minimum score of about 500 which is a significant improvement from the 65o that is typically associated with banks. From our comparison of term loans and merchant cash advance, it is easy to see how that a merchant loan is ideal for business in dire need of cash. For one thing, lowering the requirements as merchant lenders have done will undoubtedly give more businesses access to funding. It, however, has to be said that unsecured loans are more expensive than secured term loans. There is still another favorite source of small business funding that has to be compared with merchant cash advance, and that is invoice factoring.
How Merchant Cash Advance Compares With Invoice Factoring
Another source of funding which has been around for some time is invoice factoring. Invoice factoring is useful when a business has a significant amount of money tied up in debt and cannot afford to wait for the owing customers to pay back. The business then takes the crucial step of contacting an invoice factoring firm to buy off the debt. It is something similar to unsecured loans only that the amount obtained from the factoring firm is a debt that is sold while in the case of merchant cash advance, the amount obtained represents future credit card sales that have been sold to the merchant lender. In spite of the similarity between invoice factoring and merchant cash advance, there are some significant differences. For one thing that amount that can be obtained through invoice factoring is limited to the debt, business has to sell—and that is if the business has debts in the first place. But for unsecured loans from merchant vendors, a company can obtain hundreds of thousands of dollars provided it is generating enough monthly revenue to repay the advance. Meanwhile, it is much more difficult to achieve an invoice factoring since factoring firms are not abundant, unlike merchant cash advance lenders that are in the thousands. Merchant cash advance is, in fact, one of the fastest means of obtaining funding as funds can be made available in a matter of days. By and large merchant loans are a better source of unsecured business loans than invoice factoring.
Concluding Thoughts on Merchant Cash Advance
Although we tried to compare merchant cash advance with term loans one thing that has to be said is that merchant cash advance is not a loan. It is, in reality, a business transaction where a merchant sells its future credit card receivables to a lender. The lender through this transaction has a stake in the business as a percentage of credit card sales if forwarded to the merchant lender on a daily basis until the advance has been fully repaid. The process of obtaining a merchant cash advance is very straightforward, and that is one of the reasons why small businesses seem to find it quite attractive. Unsecured loans such as MCA are the ideal for business growth and expansion since they are readily available. Because of this, the success of merchant cash lenders should not come to anyone as a surprise.