A credit card processing loan is one of the two main options that are available to a small business that has found it so difficult to obtain funding from traditional sources. The other option is a business line of credit. But, there are certain aspects in which both a line of credit and a credit card loan are similar. The most obvious is that both sources of funding make cash available to business almost as soon as it is needed. Before looking at some of the downsides of a business line of credit, it is important we consider what makes it appear attractive to some small business owners.
What are the obvious advantages of a business line of credit?
The first major advantage of a business line of credit which differentiates it from a credit card processing loan is that there is no application per se before borrowing can be made. The only application that is made is that which is done before the credit line is opened. Once the line has been opened a request for funds are often honored within two days. Lines of credit are also of lower rates than merchant cash advance. In some cases, the rates for a line of credit might be lower than eve some term loans. The situation is, however different if the source of the line of credit is not a bank or credit union. Lines of credit offered by online lenders will be of almost the same cost as a credit card processing loan. Most importantly the business only has to pay interest on used funds and not the entire line of credit.
What are the downsides of a business line of credit?
Unlike merchant cash advance the process of getting a business line of credit can be very tedious. Of course one is referring to the initial application process of trying to establish the line in the first place. It could take several weeks and often requires rigorous documentation and might even involve talking to an underwriter. All of this does not happen in the case of a credit card processing loan. And like was said earlier, an online business line of credit might be faster but rates will be higher and smaller credit facilities will be offered.
Variable and potentially high-interest rates
Lines of credit also have variable interest rates. This means that the borrowing business has to pay interests that will change along with some prime rate, or another similar metric. If the prime rate goes up as is often the case, the business is made to pay more for borrowing. For a credit card processing loan, the business only pays a fixed charge for the advance. Although the charge is relatively higher than what might obtain with a line of credit, it is preferable to an unpredictable variable interest rate.
Liens and personal guarantees
Above all, despite the close relationship a business has to have with its bank before being issued a line of credit, it is still required to provide a personal guarantee. In cases where a personal guarantee is not extracted, a blanket lien is placed on the business. Such a lien gives the lender the right seized all of the assets belonging to the business if it defaults, or else it takes possession of any collateral that has been offered. But for a credit card processing loan, collateral or personal guarantee will not be required. Nor will a lien be placed on the business.
More on merchant cash advance
From our comparison so far of a credit card processing loan and a business line of credit it is quite clear that a merchant cash advance as it is sometimes called stands as a better option. The only objection some persons might have concerning a merchant loan is likely to border on its cost. This is something that one needs to examine closely. First things first, the relatively cheaper business line of credit cannot be obtained without such stringent requirements of a basket lien and personal guarantee. But merchant loans are easily obtained by small businesses that cannot boast of real estate assets that could serve as collateral.
Why is a merchant cash advance more expensive?
This explains why a credit card processing loan is somewhat more expensive than a line of credit. For in such a loan the merchant cash advance provider bears all the risks and stands to lose all of his investments of the business fails. Even in certain instances where merchant lenders tried to obtain personal guarantees from business owners it often did not end well. Court rulings, when disputes arose, always favored the merchant lenders. In nearly every case the courts always affirmed that a credit card processing loan is not a conventional bank loan. As such lenders cannot have any form of guarantee.
To understand this one needs only look at what a merchant loan is defined to be. It is a transaction involving two businesses where the borrowing business offers a share of its future receivables to the lending business to get cash upfront for business activities. Once the agreement has been signed, both parties are bound by the terms of the term agreement.
Final Thoughts on merchant funding
So far we have examined merchant cash advance in comparison with a business line of credit. Looking at it, one can see how it is that a credit card processing loan is a better option. If one also considers other benefits associated with merchant loans such as high approval rates and the fact that right credit scores are not required, one quickly sees how the benefits more than equal the cost. It is for the reasons that given a chance small business owners have more often than not opted for merchant loans ahead of a line of credit.