It is often a big challenge knowing where to turn when in search of a small loan for business purposes. The current state of the economy which recently rebounded from a major economic crisis has made the situation more even more difficult. With commercial bank lending to small businesses dwindling with each passing year, it is difficult to predict if things would get better or worse.
Small businesses are now wondering where to turn in these trying times. No doubt, the search for a viable alternative to small business funding has led business owners to alternative financing. As we shall see, alternative financing has proven to be the difference for small businesses, enabling thousands of businesses to survive.
What does the alternative lending industry look like and what does it stand for?
The alternative industry is an industry that is primarily concerned with the problems of small-scale businesses, particularly in the area of having access to a small loan for business. The main drive of the whole alternative lending industry has been to fill the gap created by commercial banks and other traditional financial institutions in the provision of funding to small businesses. There are essential characteristics of the alternative lending industry in which merchant cash advance providers are the major players.
The main feature of the alternative lending industry is that is unregulated. Governments at the federal and state levels have no control over the activities of alternative lenders as they do over commercial banks. This picture of the alternative industry and the merchant cash advance subsector might appear at first glance to be very chaotic. Nothing could be further from the truth. Merchant cash advance providers and other providers of small loans for business are in reality very organized.
Does being unregulated mean that the alternative lending industry is “lawless”?
Even though the services of merchant cash advance providers and other alternative lenders cannot be characterized as a loan, and hence not bound by laws which typically to loans, there are still some laws which hold sway in the industry. In the case of merchant cash advance providers, for instance, such laws as the uniform commercial code and the fair credit reporting act apply in all merchant cash advance transactions. Being that merchant cash advance is a transaction between two businesses—one a lender, the other seeking a small loan for business—laws that govern business to business transactions also apply.
Is there some form of internal regulation outside that of the government?
It might be expected that some form of internal control exists in the merchant cash advance industry or alternative lending industry in general. That understandably might be a good idea, considering the cases of heinous practices of some merchant cash advance lenders. These merchant cash advance lenders do not fully explain the terms of the contract to the merchant in need of a small loan for business, and before anyone realizes what is happening, the business finds itself trapped.
However, the major players in the merchant cash advance industry are working toward such conventions that could enable the industry to be more organized. If such a move succeeds, although individual merchant cash advance providers would not be compelled to abide by the conventions, it would be a step in the right for merchant vendors. Having looked at what the alternative lending industry led by merchant cash vendors looks like, it is time to shift our focus on the essential feature of merchant cash as a source of small loan for business.
Essential features of a merchant cash advance transaction
One of the most basic features of merchant cash advance transactions is that it does not involve fixed terms as is the case with commercial bank loans. In the case of term loans, a business is issued a specific amount of money on which interest is charged. The business agrees to unconditionally repay the capital plus interest over a specific period.
The business then makes monthly payments until the debt has been paid. Failure to pay at the right time could attract severe consequences and, earthy payments could precipitate rewards. This is in sharp contrast to what a small loan for business requires that there is are no late payments are such and no rewards for early payments whatever that means.
One thing also worthy of note about merchant cash loans is that interest is it charged on them. Because it is merely a transaction in which a borrowing business sells its future receivables to the merchant cash advance provider, only a fixed fee which represents the discount in the sale is charged.
Meanwhile, there is no explicit agreement that the merchant is to unconditionally repay the small loan for business. It is in fact assumed rightly or wrongly that the business is under no obligation to repay the advance since no collateral or guarantee was provided in the first place. This does not mean however that the merchant can deliberately defraud the merchant lender.
Important Benefits of Merchant Cash Advance
Obtaining a small loan for business from merchant cash advance providers comes with some benefits which cannot be overlooked. It cannot be overemphasized how much of a relief merchant cash advance has been too small businesses that were hitherto unable to obtain finding owing to their inability to provide collateral. Merchant cash advance lenders have also shown that there is no need for a business to battle furiously to improve its credit score since it can obtain funding even with a poor score.
While commercial traditional lenders are insisting on credit scores of 600 and above, merchant lenders would accept anything from 500. The fact is that merchant cash dance providers are committed to the success of small businesses, while commercial banks can afford to be indifferent since they make more money from lending to big businesses anyway. No matter how one might look at, when it comes to providing a small loan for business, merchant cash advance providers have no equals.