Alternatives to Merchant Cash Advances
Your business has finally reached a point where you need additional capital. You have been searching for various options to help fund your business growth. You know that having additional funding will help increase your revenue stream. You have been called multiple times by merchant cash advance brokers offering you quick, easy money.
Like any business owner, the temptation of having quick, additional cash on hand is hard to pass up. You are told that you only need to show 3 months of bank statements and can have money in your bank account within a day or two. You decide to send in your bank statements and to your quick surprise, you have been approved for $25,000.00.
Quick reflex would be to accept the funds and prepare to spend it as you see fit. What you and most other business owners are not considering at that time is, what are the true terms of the money being offered? How will it affect my daily cash flow? What is this quick and easy loan truly going to cost me?
If you are not aware how merchant cash advances operate, they take a daily percentage of your future credit card or bank receivables. This is normally about 20% of the daily income you are receiving. If you are not truly prepared for this, it can devastate a business.
On top of the daily debits, you need to be aware of the extremely high interest rates you will most likely be charged. If you calculate the true cost of merchant cash advances, we have seen the interest rates with fees to be well over 100%.
These advances are very troublesome for almost all business owners and we advise you to stay clear of them if by any means possible.
Your goal as a business owner is to do everything in your power to find healthy alternatives to merchant cash advances for your business capital needs. Our goal here is to educate you as to what other business funding options may be available to you. We suggest you research all of these other options before you sign any merchant cash advance agreement.
Installment loans are a very common means of business financing. These loans involve a set amount of money that is paid back through a set schedule of payments. Payments are normally paid every month and applied to both the principal of the loan as well as the interest charged by the lender. The interest rate is determined by a variety of factors including credit score and the length of time in business.
Traditional banks offer these types of loans with very fair rates and longer terms. Other non-traditional lenders offer short term loans with much higher rates. Reach out to your personal bank or credit union and see what options may be available to you. If you don’t qualify, you may be able to find an online lender with more lenient guidelines, but also with higher percentage rates.
SBA loans are federal loans offered by the Small Business Administration. These are low cost government backed loans offered by approved lenders. Most of the larger banking institutions are approved to offer SBA loans.
The SBA guarantees a large percentage of SBA loans and therefore, lenders are very pleased to qualify you for an SBA loan if they can, because the loan risk is minimized by the financial security of the Federal Government.
There are many types of SBA loans available. The standard program offers up to $5 million for most business purposes. They also have micro loans up to $50,000 that are available for smaller financing needs. Additionally, they have real estate loans, loans for underserved communities and special loans for those in the military.
SBA loans do require a higher credit score (usually over 600) and can take months to go through the process. Although the process may take longer than other loans, the rates and terms on these loans are some of the best you can get.
Economic Injury and Disaster Loans
The SBA’s Economic Injury Disaster Loan (EIDL) program provides small businesses (SMB) with working capital loans of up to $2 million to help SMBs overcome the temporary loss of revenue.
The key is this is a working capital loan program and the funds cannot be used for business expansion, bonuses, and other expenses that are not related to revenue shortfall from the coronavirus (COVID-19) emergency.
SMBs and private non-profits in all U.S. states, Washington D.C., and territories are also eligible to apply for an Economic Injury Disaster Loan (EIDL) emergency advance of up to $10,000.
If the EIDL application is denied, the $10,000 advance will not have to be paid back. The emergency advance may be used for any regular operational business expenses related to the loss of revenue from the disaster, such as payroll, sick leave, inventory, production costs, rents or mortgages, etc.
For SBA loans over $25,000, the SBA will request information on available collateral and require detailed financial records. A lack of collateral will not disqualify an otherwise creditworthy applicant.
The EIDL and emergency advance are only available to businesses that were operational as of January 31, 2020. The advance is only available until December 31, 2020.
For those SMBs whose EIDL SBA loan is approved, interest rates are 3.75% for small businesses and 2.75% for non-profit organizations. Unlike standard SBA loans that are funded through banks and backed by the SBA, the money for the EIDL loans arrive directly from the U.S. Treasury.
Lines of Credit
A line of credit is very similar to a traditional credit card. You are given a credit limit and you are able to use money up to that limit. Interest will be applied to the amount of money as you use it. You are then required to make monthly payments to the lender for the money being used.
These types of loans can be offered as both secured and unsecured lines of credit.
Secured lines of credit require you to put up some type of collateral to secure the loan. Typical types of security are assets and property. Your credit and past payment history will decide which type of credit line is offered to you.
Secured lines of credit are only offered if you do not qualify for an unsecured line of credit. Most traditional banks offer lines of credit to their existing customers.
If you need money to purchase equipment, there are lenders that solely specialize in equipment loans. This enables you to finance the purchase of the equipment and not have to pay for it all upfront.
This is a form of a secured loan which is secured by the equipment itself. You will make monthly payments and pay interest on the money used to finance the equipment.
These types of loans are usually much easier to qualify for than SBA loan or an installment loan. The lender can repossess the equipment if the loan is defaulted on which makes this a less risky loan for the lender.
Invoice Financing/Traditional Factoring
Many businesses offer terms on their goods they offer for sale. Sometimes the slower paying receivables causes a cash flow crunch for businesses. There are lenders that will purchase your outstanding receivables. This is called invoice factoring.
The lender will pay you an upfront percentage of your outstanding invoices. They will then collect the money owed from your clients directly, pay you the money that is owed, minus an agreed upon interest percentage of each invoice that is collected. The percentages that you must pay the factoring company are normally quite fair, less than 10%.
There are many private investors out there that are always looking for good investments. There are crowdfunding sites and peer to peer networks where you can showcase your business for investors to see. They then decide if they want to invest or not.
There are even local investors you may find on Craigslist who are looking to put some money and even some time into helping a local business. Please take the time and do your due diligence on any private investor as there are many scammers out there.
There are also good, retired people just looking to help and do something with their time. As always, consult with a business attorney who can draft all of the needed agreements if you find the right investor for a private loan.
There are many options out there to help grow and fund your business. We have just touched on a few of the primary ones here. It is advised that you always reach out to your business banker and ask them what options may be available to you.
Any of the options above are a much less risky alternative to taking out a merchant cash advance. The rates on all of the above products will be much lower and should have much better terms than any merchant cash advance.
If you have exhausted all means of traditional lending and you are still in dire need of capital, then your last option may have to be a merchant cash advance. You need to be prepared for the daily debits that will come out of your account and be aware that the interest rates charged on this type of funding will be much higher than any other type of loan.
If a merchant advance were truly considered a loan by the courts, it would be an illegal and unenforceable loan. It would be considered a predatory loan offering usurious rates in just about every state.
If you do decide to take out a merchant cash advance, educate yourself as to what the true terms of the advance are.
If it is too difficult to figure out, find a specialist who understands how the advances are structured and can guide you as to which funders are better than others. Our team at Business Debt Law Group will always provide complimentary guidance as to what your best options may be.