Considering the significant impact of alternative lenders in the last couple of years, there is no reason for them to have to be relegated to the dark corner of the financial industry. Because of the connotation associated with the word alternative, it is not uncommon to find persons who feel that alternative lenders such as those offering ACH advance and merchant cash advance are somewhat inferior. What alternative lenders have done for instance in the case of ACH loans is to take advantage of legacy systems that have been in place for years—Automated clearing house.
One thing about the alternative lending industry is that it is filed with lenders offering services that are closely related. Because of this, it could be difficult for a business to choose the right one. Because of the much similarity between merchant cash advance and ACH advance, businesses often find it difficult to choose either of them. And, only a close examination of the two lending options could enable a business to make an informed choice. It is our purpose, therefore, to examine merchant cash loans and ACH loans, demonstrating why it is that merchant cash advance is the superior option.
What are ACH loans and how are they related to merchant cash loans?
ACH processing as far as lending and borrowing is concerned the use of electronic payment systems to handle the repayment transactions. The ACH network can be used for sending loan monies that have been approved, to the borrowers. Before an ACH advance is underwritten, the lender often verifies the bank account of the borrowing business, and also performs some background checks on it.
Lenders who make use of ACH prefer to make automatic deductions from the account of the merchant instead of waiting for the payment to be forwarded to it from the business. The major thing ACH loans have in common with merchant cash advance is that the repayment process in both cases is automatic. But there are salient differences between a merchant cash advance and an ACH advance. These differences as we shall see are the reasons merchant cash advance is often preferred by the business.
Pitfalls in ACH transactions
There are certain pitfalls in ACH transactions. There is always chance that in ACH transfers the borrower’s loan repayment will return unprocessed. There is even no exact way for one to predict whether the borrowing business has enough funds to make a payment. Although lenders who wish to set up automatic debits for, merchants so that loan repayments are made through ACH can approve loans based on some prearranged payment schedule, there are still problems with ACH advance.
What is Merchant Cash Advance and how is it superior to ACH loans?
Merchant cash advance is a form of business lending that is quite different from ACH loans. One thing about ACH loans is that they bear much resemblance to term loans. The only major difference might be that, instead of the lender which in the case of term loans is a commercial bank to allow the business to make payments on a monthly basis ACH loans entail the automatic debiting of the borrower by the lender.
A merchant cash advance, on the other hand, is simply a purchase of the future receivables of business in exchange for a lump sum of cash. The idea behind merchant cash is that a business should be able to sell its future credit receivables at a discount to a merchant cash advance provider. Unlike ACH advance, merchants do not automatically get debited by the lender in the case of merchant cash advance transactions. What happens in most of the cases is that the business authorizes it processor to make payments to the merchant cash advance lender on a daily basis until the payment has been completed.
The superiority of merchant cash advance over ACH loans
But in sharp contrast to what obtains in ACH Advance where a fixed amount is taken by the lender at the stipulated interval, merchant cash advance payments are made in accordance to how much the business is generating then. To achieve this, the merchant cash advance transaction stipulates a fixed percentage of the daily credit card sales of the business which is to be sent to the merchant lender. Since the business has to pay according to how much it makes, there is less strain on the cash flow of the business.
Because in merchant cash advance transactions the business makes payment through the method of batch splitting in most of the cases, it has greater control. Meanwhile in as far as merchant cash advance is concerned the borrowing business is not under any obligation to repay the advance, if for an unexpected event occurs which is beyond the control of the merchant, then the merchant cannot be held liable. This might not be true for an ACH advance.
In addition to all of these, the approval rate of merchant cash advance far exceeds that of Ach loans simply because the lender is more confident that as long as the business is making sales, it can recoup its investment. Such a high approval rate means that merchant cash advance is ideal emergency situations. Moreover, the whole process of obtaining a merchant cash advance is more simplified than that of ACH advance.
Final Words on Merchant cash advance
Merchant cash advance lenders are the leaders in the alternative lending industry. Their success can only be attributed to the fact that small businesses have had their lending needs met, through MCA. The fact remains that thousands of small businesses are still thriving because of the input of merchant cash advance. Even though other alternative lenders are contributing their quota, merchant lenders have surpassed them all. Unlike an ACH advance, merchant loans are more reliable. Little wonder small businesses are beginning to gravitate towards merchant lenders. The merchant cash advance has proven that it is capable of filling the gap created by traditional lenders. It is expected that merchant lenders might one day become the number one source of funding for small businesses.