Why Merchant Financing is the Best Alternative to Commercial Bank Loans

Oftentimes a business has to make decisions that are vital for its survival. One such decision is that having to do with the means of financing. This is because it is quite common for businesses to be unable to meet all of their obligations with the funds generated from within the business. In such situations, the usual practice has always been for the business to resort to external sources of finding. Obtaining personal loan for business activities is, therefore, something a business a business has to grapple with on a more less consistent basis. The problem small businesses in particular face in deciding which funding option is best for them has been significantly compounded by the emergence of alternative lenders.

Alternative lenders such as merchant cash advance providers have a common goal which is to be bridge the gap in the traditional lending industry championed by commercial banks which has made a personal loan for small business out of the reach of many. Merchant cash advance provider and other alternative lenders have been so successful that they have even forced commercial banks to re-examine their lending policies towards small businesses. At present, it has become clear to traditional financing institution that they have to struggle for a share of the small business lending industry. While some banks have decided to embark on some form of online lending that closely mirrors merchant cash advance, others have decided to somehow collaborate with leading merchant loan providers as investors.  Before taking a closer look at merchant cash advance it is in place for us to consider some other relatively popular alternative sources of personal loan for small business.

Read More: Obtaining Quick Business Loans Through Merchant Advance Express

Invoice Factoring

Invoice factoring is one of the oldest sources of alternative financing which small businesses have utilized. It is different from merchant cash advance and even commercial bank loans in that it involves buying over the debts a business is being owed in the form of unpaid invoices. What happens is that if a business has a significant amount of money tied down to debtors, it can choose to sell those invoices to a factoring firm in exchange for cash. The amount the business gets in the way of the personal loan for small business is not, however, equal to the value of the invoice. It is a normal practice for invoice factoring firms to pay around 80 to 90 percent of the value of the debts. The remaining fraction obviously serves as profit for them.

There are some factors which factoring firms consider before deciding on how much it is going to pay for the loan. One of such factors is how long the debt has been owed. It is the usual practice for a factoring firm to pay lesser for an old debt than for a new one. Furthermore, debts that are owed the business by smaller firms attract a lesser percentage than those of big firms. In spite of the fact that invoice factoring is quite an easy way for a business to have access to a personal loan for small business, it has some major drawbacks.

First, the amount that a business can borrow is limited to what it is owed by customers and this will not always be sufficient to meet the needs of the business. This is very much unlike merchant cash advance which provides funds for businesses which exceed their revenues. A business does not even need to be owed before it can have access to funding, the opposite of which is what obtains with invoice factoring.Moreover, finding factoring firms nowadays might prove to be a challenge for businesses. But, since merchant cash advance providers are already more than a thousand and are spread across the entire country, getting, a personal loan for small business could never pose a serious challenge.

Venture Capital

There are certain individuals that are always looking for promising businesses in which to invest. Small businesses that show great promise, often those that are driven by new technology, can always look to these venture capitalists instead of commercial banks or even the government. One good thing about venture capital is that is that the amount that of personal loan for small business that can be issued is virtually limitless.

Unlike merchant cash advance providers, venture capitalists often insist on owning a part of the business until their investment has been recouped. In most cases, this could take as many as five years. But, in a merchant cash advance transaction, a business does not have to lose some of its autonomy and, in any case, it usually takes less than 18 months for the advance to be repaid because of the way it payment is structured. Another downside of venture capital is that it is very difficult to access.

This is because venture capitalists are primarily looking for businesses built around some patented technology in order to ensure maximum profit. In contrast, merchant cash advance is suited to the needs of any kind of business, provided that the business meets the monthly sales requirement and other minor requirements for merchant cash advance. A Personal Loan for small business as result can be best be obtained from merchant cash advance providers instead of venture capitalists and invoice factoring firms which have been considered.

Read More: The Difference Between Loans, Cash Advances, and Factoring

Merchant Cash Advance and its Benefits

Merchant cash advance is simply a transaction in which a business agrees to sell a fraction of its future receivables to a lender at a discounted price. Unlike a bank loan, interest is not charged on a merchant advance; rather a fixed fee in the form of a social factoring is paid. The factor rate in most cases does not exceed 1.5, while the retrieval rate, which is the percentage of the daily sales that are to be remitted to the merchant cash advance provider, does not usually exceed 25 percent. Having said that, as soon as both parties have agreed to the factor rate, the merchant cash advance agreement is signed the personal loan for small business is issued. The business then continues to make daily payments until the advance has been repaid.

There are several benefits of merchant cash advance, some of which have been discussed earlier. In any case, the ease and speed with which a merchant cash advance can be obtained have been one of the top reasons merchants are embracing it. Also, merchant vendors do not require collateral and good credit scores before loans are granted to small businesses. Above all, the extremely high approval rate of merchant cash advance means that a business can be assured that a loan application is certainly going to be successful. Indeed, the role merchant cash advance providers have played in providing personal loans for small businesses cannot be overemphasized.

By | 2018-02-09T14:08:26+00:00 February 6th, 2018|Business Loan|