Traditional loan lenders are usually associated with difficult and tedious loan application procedures. Apart from that, the requirement of providing collateral has pushed many away. These forms of asset based lending are quite unfair to small businesses that direly need a loan to push their ventures forward. However, some alternative lenders have come forward to help these businesses and are called merchant cash advance providers.
A merchant cash advance is not anything like asset based lending. In fact, a new business would not have to put up any collateral to be considered for an MCA. The loan application is elaborate and simple, and minimum documentation is required.
What is a merchant cash advance?
A merchant cash advance, or MCA, is a form of funding where a third-party lender or credit card processor advances you money based on the volume of credit card sales. The lending company purchases a dividend of your future credit card sales. The company repays the advance through automatic deduction from daily credit card sales instead of a monthly payment.
Advantages of merchant cash advance
Easy application process
Applying for a merchant cash advance is easy and quick. You can fill up the application forms online and provide the required documentation and information like recent credit card processing statements with ease. The application forms don’t consume much time, and providers usually respond within 48 hours.
Access to of capital fast and quick
If the application is approved, you receive the capital within a week from your provider. Obtaining the capital is such a short amount of time enables you to start putting the funds into your business and improve the cash flow. The approval rates of MCA loans are also higher than that of asset based lending options.
Won’t affect the credit
Securing an MCA won’t affect your business’s credit negatively. Simply put, you are not taking out a loan; you are just selling future credit card sales for capital. Hence, you will not have to worry about paying back the monthly loan. Additionally, you don’t need a great credit card score to apply, so you don’t need to spend time improving your credit scores.
What is asset based lending?
Simply put, ABLs are based on assets like inventory and accounts receivable, which can be used as collateral. It means that you are putting your future revenue on the line to gain financial access right now. ABL lenders will advance your funds based on the agreed percentage of secured assets’ value, which generally is 50% of the finished inventory and 70% to 80% of the eligible receivables.
Immediate source of working capital
The best advantage of asset based lending is that once approved; you will have an immediate source of working capital. It also goes through an approval process that is much quicker than traditional loans. Not only obtaining the loan is easier, but you can also increase assets from the company increase.
Flexibility in spending
Unlike traditional loans that have to meet specific purposes, asset based lending can be used anyhow as long as it can be qualified as a business expenditure. It is wise for a business that is looking for ABLs to research first which purchases qualify and which don’t.
Improvement in the company’s credit portfolio
An asset based loan can improve a company’s credit ratings over a period. This happens because the principal balance gets recycled into a credit’s revolving line, thereby allowing for rapid expansion and growth without taking on debt.
Loss of assets
The worst case that can happen to a company involved in asset based lending is that it might have to forfeit its collateral. An ABL lender looks at the assets owned by the company, so defaulting on payments can result in forfeiture of property, inventory, and equipment.
Over-mortgaging of loans
In this particular scenario, a company could over-mortgage its loans if they owe more than the value of the assets that are being used as collateral. In such cases, the company can potentially lose more money than it did before accessing the loan.
Asset based lending is a secured loan
Even though asset based lending will help your company in the long run, it is essentially a secured loan; it means that the asset based loan does not increase the immediate value of the company. Essentially, companies that are using ABL loans are trading goods for liquefied assets. However, since ABL loan is a revolving line of credit, drawing from it as a renewable source of capital outweighs the time taken to build credit scores often.
Difference between merchant cash advance and asset based lending
Mainly, the difference between the two is that asset based loans use collateral in the form of guarantee whereas merchant cash advance does not use a guarantee for assuring a return. Also, merchant cash advances exchange hands very quickly, thanks to the quick application and approval process.
An asset based loan has a small loan interest rate; a merchant cash advance provides more flexibility to pre-existing bankruptcies and no additional fees, apart from interest. MCA is more appropriate for businesses with lesser assets. It is a better option for companies with credit scores that can be rejected by other loan lending bodies. As long as you have a steady inflow of cash, you can receive funding via merchant cash advances for your business.
Asset based lending has had denied many small businesses a chance to enjoy business loans because of its criteria. However, alternative lenders like merchant cash advances have now come to their rescue. You can approach a modern merchant cash advance lender if you promptly need finance to establish your business needs.
Merchant cash advances can boost your working capital, business expansion, or even an upgrade. You should not hesitate to reach out to your MCA lender to keep your business or company floating and sustainable.