Many businesses turn to Merchant Cash Advances as an alternative to traditional financing due to the fast turnaround time for approval. In most cases, businesses are in need of a quick solution to their cash flow problems so they overlook the stipulations. What they don’t realize, is that the fees applied by MCA’s are far greater than those from other traditional products.

A Merchant Cash Advance is an advance given to a business for a specific amount. MCA’s differ from traditional lending products so they are governed by different regulations that don’t need to consider creditworthiness as an approval factor. MCA’s only work with businesses that utilize card terminals to receive payments from customers. They use the volume of debit/credit card sales, profit margins, and business turnover as factors for approval as opposed to creditworthiness. They then use these factors to determine the lending risk as the amount lent gets based on the future sales projections of the borrower. Unlike traditional loans, MCA’s don’t charge interest rates or APRs that gets applied to the principal balance. Instead, the amount paid to the lender is based on a common factor rate. This rate can fall anywhere between 1.2 and 1.5 on average. This factor rate gets applied to the amount lent to the borrower. For example, if you borrow $25,000 and are given a factor rate of 1.4, then the amount you’ll have to pay back is $35,000. That means you’ll end up paying back $10,000 at the end of your term. In regards to short-term lending, this can be very expensive.

Although MCA’s have the advantage of being flexible, fast, and less demanding, there are other alternatives.

Short Term Business Loans

On average, repayment periods for Short Term Business Loans can range anywhere from 1 to 5 years. Previously, short-term business loans were not a popular option for businesses looking for quick cash. Now, digital lending software has made it easier for lenders to review applications and disburse funds quickly. The benefit of short-term business loans is they have fixed APRs, consistent payments, and feasible repayment periods.  With the advancement of online services, applications and document submissions can be completed quickly and conveniently.

Business Line of Credit

A more popular alternative, Business Lines of Credit appeal to businesses because provide more flexibility. A business line of credit has a maximum amount that can be drawn from. The benefit of the line of credit is the borrower only pays for the amount that gets drawn from the credit. For example, if you have a line of credit of $10,000 and you draw $6,000 from it, you only pay back the $6,000 while still maintaining access to the remaining $4,000 available if needed. Businesses in need of quick access to funds can do so immediately by simply transferring or withdrawing the money. This can be beneficial for businesses in need of immediate financing. APRs for lines of credit are typically variable but payments can be scheduled monthly and are based on the amount owed. Many businesses will borrow from lines of credit to access working capital, maintain their monthly payments, and simply pay off the amount owed when they have a surplus of cash flow.

Equipment Loans

For businesses in need of funds to purchase equipment, Equipment Loans are a perfect financing solution. Vehicles, machines, and computers have significant value and can act as collateral for the loan itself. Lenders factor in the value of the equipment and the depreciation to cover the loan. Equipment loans cover the risk for the lender as they can simply repossess the equipment in the case of failure to repay.  Due to the minimized risk, small business owners can sometimes borrow equipment loans at 100% of the cost of the equipment from the lender at a reasonable rate. These loans can also include fixed APRs, consistent payments, and feasible repayment periods. 

Conclusion

For many businesses, MCA’s are still the go-to option for lending. But considering the alternatives mentioned above, there are lending options that offer just as much flexibility and convenience. If you are a business considering options, be sure to factor in the pros and cons so you can make a financial decision that’s best for you.