Making a Sound Choice Between Government Small Business Loans and Merchant Cash Advance

gpvernment small business loans

Small businesses are having a really hard time trying to get by in the present time. This, of course, has a lot to do with the fact that commercial bank lending to small businesses has plummeted in the last couple of years. The situation is such that more than half of all loan applications to commercial banks and other traditional lending institutions end up being rejected, a situation which has warranted the emergence of government small business loans. The alternative industry as a whole has made the situation much easier for small businesses by providing them with an easier and even faster means of obtaining funding. The alternative lending industry, in particular, is driven by the activities of merchant cash advance providers whose success has resulted in the multiplication of merchant cash advance vendors in the country.

How has the government responded to the issue of lack of funding for small businesses?

The government has also responded to the plight of small businesses in the country.

Government small business loans which are provided through the small business administration are aimed at making loans much more accessible to small businesses. These loans are often called SBA loans as they are facilitated by the small business administration. The small business administration works hand in hand with commercial banks to ensure that more and more small businesses have access to funding. The scheme has been quite successful in its own right but government small business loans have not filled all the gap s in the traditional lending sector, and that is why alternative lenders remain very important.

How do government-backed loans from the small business administration work?

It is important for one to consider how the government-backed loans from the SBA work for it to be favorably compared with merchant cash advance. The major role of the small businesses administration is to provide a guarantee for the loans which commercial banks issue to small businesses. The administration does not issue loans directly to businesses. But their function does not stop there. It is also typical for the SBA to underwrite the loans and whatever is approved by the administration is considered by the banks.

Does the small business administration provide 100% guarantee?

Depending on the particular circumstance the business might approach the small business administration directly; otherwise, banks that partner with the SBA can forward loan application to them for approval. Once it is approved the banks issue the funds to the businesses. It must be noted that the SBA does not necessarily provide a full guarantee for the loans. In most case, only around 80 to 90 percent guarantee is provided. The business provides the remainder. In spite of how good government small business loans might seem, there are significant issues that might not make it the first choice for businesses in dire need of funds.

What are the downsides of government small business loans that make mca a better option?

The difficulty in obtaining government-backed loans

The main issue with government small business loans is that it is extremely difficult to obtain. It even turns out—expectedly—to be more difficult to obtain than a term loan. The sole fact that the government bears all of the risks makes the approval process very rigorous. This kind of funding option is surely not one to be pursued by a business in critical need of funds. Merchant cash advance, on the other hand, is aptly suited for emergency conditions. Merchant loans are likely the easiest kind of loans to obtain on the plant. It only requires minor paperwork and in a matter of days funds reach the business.

The problem of collateral and personal guarantee

Government small business loans also require some form of guarantee even if it is limited to 10 to 20 percent on the part of the business. This could pose a significant challenge especially if the requested amount is large. But as far as merchant cash advance is concerned, the business is not required to provide collateral or guarantee. And even in cases where some unscrupulous merchant lenders succeeded in extracting guarantees from merchants, it was not always enforceable in the end. For the ideal merchant cash advance transaction, is one in which the lender bears all of the risks in contrast to government small business loans in which the risk is shared between the government and the borrowing business.

The problem of speed

Sometimes a new window of opportunity could open for a business at a time when it does not have the required funds. In such a time nothing could be more important to the business than obtaining funds as quickly as possible. The process of obtaining government small business loans can be very lengthy and would typically span months. The fact that so much documentation is often required at every stage is what is responsible for the delay. So except business is looking at obtaining funds for relatively long-term business activity, government small business loans provided by the small business administration might as well be ruled out.

The problem of certainty

It is well known that in spite of the lengthy waiting periods and rigorous documentation associated with SBA backed loans, the chances of an application being successful are low. Conservative estimates will have the approval rate well under 50 percent. There is no gainsaying the fact that a business wants to know that all its efforts channeled towards ensuring that it obtains funding does not end in futility. And that is what is most likely to happen with government small business loans. This problem, of course, is eliminated by merchant cash advance providers.

Nearly all applications for a cash advance ends up being approved since the emphasis is not placed on credit score and collateral. For any business that wants to certainty in the whole process of seeking business financing, merchant cash advance stands as the best option.  It is because of this that thousands of businesses have come to recognize merchant cash advance as a perfect alternative to both term and SBA loans.

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