The fact that small businesses now have so many options when it comes to the issue of obtaining business funding from external sources has made deciding on which is the best course of action to be very difficult. Even though a one-time loan from commercial banks used to be the number one choice, small businesses are fast exploring other ways of securing funding.
The “orthodox” lending industry governed by commercial banks has over the last few years had been a humongous source of concern for business owners. This has been because of the intrusion of alternative lending institutions that have piqued the interest of small business owners. Of course, we are talking about merchant cash advance providers, who, in their quest to make funding easily available to small businesses, have so much simplified the lending process.
A business line of credit might seem like it has so much in common with a merchant cash advance. This might be true since a line of credit and a merchant cash advance are ways in which a business can get funding at a particular time while promising to repay somewhat the amount that has been borrowed at some point in the future.
To understand how a business line of credit is different from a merchant cash advance, and which one of them might be the better option, it is important for one to understand what a line of credit and a merchant cash advance both are.
What is a business line of credit and what are the possible advantages of opting for a line of credit?
A business line of credit is an arrangement between a bank and a business where the business is allowed to source funds each time it is in need. The funds available to the business often have a limit that cannot be exceeded. And as long as the businesses are still within its borrowing limits, it can count on those funds when in dire need. One good thing about a line of credit is that the business only pays interest on the actual amount that is drawn and not on the entire limit.
A business line of credit is also easier to obtain, at least in comparison with a commercial bank loan. No pool of small sweat businesses is accustomed to pouring when they seek to get funding from banks. A business line of credit is meant for short-term use as it often utilized to boost cash flow or to finance some unexpected expenses like equipment purchase. In spite of the seemingly good benefits of a line of credit, there are reasons why a business has to think twice before opting for one.
For one thing, the amount that can be obtained through a business line of credit is much smaller than that which can be obtained through banks as a loan or through other forms of lending such as merchant cash advance which enables a business to obtain as much as $5 million depending on the volume of its credit card sales.
One more thing is that a business can obtain a line of credit from its bank. This means that the option of available the business is very much limited. As such it might not exactly be in a good position to negotiate better and more favorable terms. This is in sharp contrast to what obtains in a merchant cash advance where the options are almost unlimited as there over one thousand merchant cash advance providers scattered across the country.
Unlike a business line of credit, a merchant cash advance does not call for interests at all, since a merchant cash advance is itself a sales transaction. There are even more reasons why merchant cash advance might be preferable to a line of credit. These reasons will become apparent as we take a closer look at merchant cash advance.
What is merchant cash advance and why is it a better option than a line of credit?
A merchant cash advance is one of the leading sources of alternative business financing. It is primarily a commercial transaction in which a business sells it future receivables to a merchant cash advance providers. Unlike a business line of credit, everything about merchant cash advance is unregulated. This in itself makes for a smooth operation of industry practitioners.
There are plenty of reasons why the industry has been multiplying despite detractions by skeptics. One of the main objections that are raised regarding merchant cash advance has to with its cost. Before looking at the many benefits of a cash advance which a line of credit cannot offer, it is important that we examine the reason why a merchant cash advance is relatively more expensive.
One of the things a bank often considers before deciding on the amount of interest that is to be paid for a loan is the risk it becomes vulnerable to. In the case of a business line of credit, regardless of the fact that the amount involved is quite small, banks would normally insist on collateral and other forms of personal guarantees. But, merchant cash advance providers do not ask for collateral or personal guarantees before issuing funds to small businesses.
This means that merchant cash advance providers take the take the maximum level of risk. Since the risk is that high, it behooves the merchant cash advance providers to charge relatively higher for their services. Let us take a look at some of the benefits of merchant cash advance.
The first thing that attracts small business owners to merchant cash advance is the speed with which funding can be obtained.
Although a business line of credit can be sources of quick business finance, it is only after it has been approved by the bank that it comes to life. The initial process can be very lengthy. In addition to the fact that merchant cash advance providers do not require collateral before issuing loans, they also do not need businesses to have a good credit score before getting funds.
This means that businesses with poor scores that might have been refused a business line of credit will have no qualms getting a cash advance. Above all, the high approval rate of merchant cash advance beats that of all other lending sources, socially the traditional ones.
A business in dire need of funding can be sure of getting funds from merchant cash advance providers since approval rates exceed 90 percent. There is little doubt that with these benefits, a small business will find it the smoother path to take in choosing a cash advance over a business line of credit.