One of the most daunting challenges facing small businesses is that of obtaining loans of obtaining working capital. It has been estimated that over 80 percent of small businesses rely on one form of funding or the other. On a first glance, it appears that businesses have plenty of options when it comes to seeking the best small business loans. A closer examination however immediately reveals that businesses do not have many options insofar as it has to do with what is best suited for both the short and long-term interest of the business.
What are some of the popular options that are open to small businesses in need of funding?
There are some few options that businesses have explored over the years. Some have proven quite useful over time. Commercial bank loans and other loans from traditional lending institutions are always numbered among the best small business loans for a good reason. But the emergence of merchant cash advance lenders with their provision of rapid funding to small businesses at considerable cost has called everything people believed about business funding to question. Merchant cash advance has gained so much popularity that it has now become important to evaluate other lending options relative to it.
Term loans from commercial banks
Term loans from commercial banks have always been the mainstay of businesses until the emergence of alternative lending firms championed by merchant cash advance providers. The merchant lenders immediately recognized some of the many lapses in the traditional bank lending sector. Some of these include unnecessary delay, uncertainty, demand for collateral which could be altogether avoided, and insistence on a strong credit performance before loans are issued. No matter how much one might wish to characterize term loans as one of the best small business loans, the point remains that term loans are almost out of the reach of the common business.
What are the good things about commercial bank loans?
One of the major reasons business owners have always favored commercial bank loans before the dawn of merchant cash advance is because of its cots. It is true that term loans are about the cheapest means of financing anyone can obtain. It is also true that the repayment term of commercial bank loans is quite long. Some loans can be paid off in 10 to 15 years while others could even take longer to pay off. In spite of these advantages, one might now have to think twice before regarding terms loans is one of the best small business loans.
Why other lending sources such as merchant cash advance might come ahead of term loans
One reason for this is that other lenders such as merchant vendors have shown that all of the delays in the loan underwriting process can be eliminated. Using powerful algorithms to underwrite loans, merchant cash advance lenders have been able to reduce loan process time to just a few days. This makes merchant cash advance one of the best small business loans at least insofar as speed is concerned.
The second reason merchant cash advance, for example, will come ahead of term loans any day any time is that the issue of collateral and credit score does not come up at all especially when it comes to that of collateral. Businesses can borrow money without bearing any risk thanks to the ingenuity of merchant cash advance lenders who bear all of the risks. Being one of the best small business loans, the emphasis is not placed on the credit score of a business. As long as a business is generating significant monthly revenue, it is a candidate for merchant financing.
Invoice factoring as a secondary source of small business funding
Invoice factoring is often regarded as one of the best small business loans even though it is not technically a loan. The reason invoice factoring is not a loan is that money is not issued to a business which is expected to be repaid at some time in the future. Rather invoice factoring simply involves a business selling its unpaid invoices to a factoring firm. The factoring firm after that offers the business some funds in exchange for the invoices.
What exactly is involved in invoice factoring?
One thing with invoice factoring is that the factoring firm becomes responsible for collecting then unpaid debt on instead of the owed business. Factoring firms offer the borrowing business around 80 to 90 percent of the value of the unpaid invoices, and the difference serves as profit for the firm. The amount offered depends on how likely the firm expects it will be for the debt to be paid. And generally speaking, older debts attract lower amounts while newer ones by stable businesses attract a higher cost. There is no doubt that the simplicity of invoice factoring makes it fall into the category of best small business loans except for a few problems associated with it.
Problems with invoice factoring that make it somewhat inferior to merchant cash advance
The main problem with invoice factoring is that it is only available to businesses that are being owed by customers. This is in sharp contrast to merchant cash advance which is open to all kinds of business that fulfill the general criteria for approval. Another problem with invoice factoring is that the amount that can be obtained at the end of the day has to be less than the total volume of unpaid invoices.
This inevitably makes invoice factoring so much inferior to merchant cash advance as one of the best small business loans. This is because for a merchant cash advance a business can receive up to 4 times of its monthly revenue in advance. This comparison can, of course, continue endlessly. However, it is done merchant cash advance will almost always stand out as the leading source of small business financing
We have examined how invoice factoring and term loans, both of which are regarded as one of the best small business loans, compare with merchant cash advance. In each case, merchant cash advance emerged as the better option. Although merchant cash advance is not an ideal source of business financing as it has its lapses, it remains preferable to invoice factoring and term loans at last under emergency situations.