Whether you’re just starting a business or have been running a successful company for years, there are times when you need working capital to fund business expenses. There are many borrowing options available to cover costs such as payroll, inventory, equipment, and more. One increasingly popular choice is a merchant cash advance (MCA).
This form of business financing can be convenient and get cash in your bank account quickly. However, MCAs are also expensive with confusing contracts. They can strain your business and personal finances if not handled correctly. Which is why you might want to explore safer merchant cash advance alternatives first.
How Does a Merchant Cash Advance Work?
You might be thinking, what’s so bad about merchant cash advances? After all, they’re often marketed to small business owners as fast, simple, and convenient financing options. Going through a traditional bank or credit union for a loan might take several weeks and also requires a solid business history, while securing an MCA may only take a couple of business days and less formal requirements for proof of funds. Plus, the credit requirements for MCAs are often much looser, as the advance is based on your company’s projected revenue.
Some business owners have no problems with merchant cash advance repayment. But many others find themselves dealing with high fees, low cash flow, and confusing terms that can result in a cycle of debt forcing the business to the edge of existence.
That’s because an MCA isn’t actually a traditional loan. It’s actually an advance on your future sales. The MCA provider essentially buys a chunk of your future revenue. You receive a lump sum upfront, then pay it back in daily or weekly installments — plus fees, expressed as a factor rate — over several months. In fact, due to the short-term repayment period, the cost of an MCA can equal 300% APR or more when expressed as an annual percentage rate.
There are far fewer regulations around MCAs compared to business loans and other forms of business financing. Plus, the laws that do exist vary from state to state. So it can be tough to understand what you’re agreeing to. And if you find yourself struggling, there’s little recourse available except to find an experienced merchant cash attorney who can help you understand what you agreed to and how it all impacts your business.
Best Merchant Cash Advance Alternatives
If you would rather not get involved with an MCA, the good news is that there are plenty of merchant cash advance alternatives. Here’s a look at some loan options to consider.
One of the most common forms of borrowing among businesses is an installment loan. This involves borrowing one lump sum, then paying it back according to a fixed schedule. Payments are usually made on a monthly basis, and you have several years to pay back the loan. The interest rate depends on factors such as your credit rating and how long you’ve been in business, though it’s generally pretty fair compared to an MCA.
You can find installment loans from national and community banks, credit unions, and online lenders.
These small business loans are provided by individual lenders, but they’re guaranteed by the U.S. Small Business Administration. Because of this added protection, lenders are often able to offer lower interest rates and fees on SBA loans. They’re also subject to regulatory caps.
That said, the eligibility requirements are pretty strict. For example, you need to have been in business for at least two years and have strong revenue. You also need to have a good credit history and credit score.
SBA loans also have fixed, monthly payments. The loan amount can range from a few thousand dollars up to a few million.
Additionally, the SBA offers an Economic Injury Disaster Loan (EIDL) program, which provides small businesses with up to $2 million in funds if they’ve suffered a temporary loss of revenue due to COVID-19. The money can’t be used for expanding your business, bonuses, or other expenses that aren’t directly related to revenue shortfalls caused by the pandemic.
If you need a loan in order to buy more equipment for your business, this type of financing is designed specifically for that purpose. You can purchase the equipment you need to continue operating or expand your business without having to pay for it all upfront.
Equipment loans are secured loans, meaning the equipment you finance serves as the collateral for the loan. If you fail to repay your loan, the lender can seize these assets. They’re typically easier to qualify for than SBA loans or traditional installment loans.
Business Credit Card
If you want to be able to charge expenses as needed and then repay the balance when you have more cash, a business credit card may be the right choice, especially for smaller financing needs. These credit cards are designed specifically for business owners. They come with higher credit limits, targeted rewards, and tools to help manage business and employee spending.
Business cards work similarly to personal credit cards. You’re given a certain credit limit, which you can charge against as needed. If you carry a balance month-to-month, you’re charged interest on that amount. If you pay your balance in full each month, you don’t have to pay any interest at all.
Line of Credit
A business line of credit is a type of revolving credit, meaning you’re given a credit limit that you can borrow against and pay down as often as you need to. It works similarly to a credit card and is more flexible than a loan.
Lines of credit can be secured (meaning you back the credit line with collateral) or unsecured. Secured lines of credit are typically offered to businesses that don’t qualify for one otherwise.
If you have outstanding invoices for work that you’ve already performed, it could be causing a cash crunch for your business. Invoice factoring (also known as invoice financing) may be one option for getting the funds you need faster.
Certain lenders will purchase your outstanding receivables, and then pursue your clients for the money owed directly. Once the money is paid, the lender sends those funds to you, minus a certain percentage that’s agreed upon ahead of time. The percentage you pay is usually pretty fair, however — around 10% in many cases.
Get Help With Business Debt
If you’re struggling to keep up with payments on a business debt, working with an experienced debt relief attorney could help. And if you’ve been threatened with a lawsuit by a creditor, or have already received a judgment against you, it’s crucial to have reputable legal assistance on your side.Tayne Law Group has been helping both businesses and consumers find solutions to their debt problems for more than 20 years. We offer a free, no-obligation phone consultation to learn about how our practice operates and the options you have available. You could speak with a dedicated attorney and never have your matter outsourced to third party call centers. So contact us today and find out your rights at 866-890-7337 or fill out our short contact form. Your information is never shared or sold and all conversations are confidential.