Businesses are often in need of a loan. It could be for working capital, purchase of equipment, buying inventory, renovations or perhaps an acquisition, a business will require cash to finance the project. Bank loans are helpful but not easy to secure. Small businesses especially have a tough time getting approved for bank loans because of the strict requirements and long timelines. The downturn has also spun a credit crisis that has aggravated the situation further.

Some of the available small business loans are lines of credit, term loans, equipment leasing, secured or unsecured working capital loans, SBA loans, and franchise startup loans. All these loans need considerable documentation including review of credit history, income projections, collateral as security, a convincing management and a notable growth plan. Moreover, businesses may have to approach multiple financial institutions before they receive a loan since the approval rates are not very bright.

There is one other loan choice that could be suitable for your business if you abhor the documentation and the time it takes to obtain a traditional loan or if you just cannot wait for weeks to get it approved. It is called merchant cash advance (MCA) or business cash advance. It is a much more attractive alternative for small businesses with immediate funding needs. Many banks, private companies, and credit card processing companies offer such financing. The interest rates are higher than bank loans, but the difference is not as much as it used to be a few years ago. The paperwork involved is quite minimal, and credit score… well, if it’s good, great. If not then it will not ruin your possibility of receiving an advance though it may affect the amount of cash advance sanctioned. The approval cycle is quite short – from a few hours to only 3 days! And the cash is available in your business’s bank account in a few days to a week. That’s just what makes MCA so popular – funding is available when needed the most.

The one prerequisite for the acceptance of an MCA application is a record of good credit card sales during the past nine months (typically an average of $3000-$5000) and at least nine to twelve months of having been in business. The MCA or merchant capital provider buys a percentage of your future credit card sales receipts for the advanced amount. The repayment is managed at the credit card processor’s end without any need of involvement of the business or the cash advance provider. This relieves the business of having to keep track of payment dates or the payments. Another great characteristic of an MCA is that the monthly payment fluctuates based on monthly credit card receipts and is fixed as a percentage of the same. Cash advance recipient is relieved of the stress of meeting a predetermined monthly payment since it can vary depending on monthly sales.

Since merchant cash advance is a purchase of future revenue, its providers are not regulated under financial loan laws. No rules or regulations even govern the amount of interest MCA lenders can charge a business. It is best to work only with reputable providers to avoid being ripped off. Peruse the contract with a fine tooth-comb to make certain that there are no hidden costs or confusing terms and conditions.

The merchant cash advance industry is gradually maturing and many larger players are making efforts to regulate it to some extent. As a result, MCA is fast becoming a mainstream source of funding for businesses of all sizes.

Are you anxious that the tightened restrictions on bank loans post the global economic recession will hurt your business finances? Do you fear that risky Small Business Association (SBA) loans will be more trouble that its worth and not solve the financial issues of your business? Have you considered Merchant Cash Advance (MCA), also called business cash advance, as a potential funding option for your business? Are you unable to decide between SBA loans and MCA? This article can help you decide which option is more suitable for your business and can give it the capital needed to develop and thrive.

Look at the following points when choosing between an SBA loan and MCA.

Required Financial Documents

Well established businesses are expected to submit records of current debts, outstanding balances, and installment schedules and some collateral that can be offered to the bank. New organizations have to submit a business plan that included details of monthly cash flow predictions for the initial two years when submitting a request for an SBA loan. To determine your eligibility for the loan, lenders get information on credit card debt, liquid assets, personal loans and monthly statements, tax files, and holdings of real estate.

Merchant cash advance providers ask for only two credentials while filing your application. These are monthly credit card processing receipt volume and longevity of the business. These two factors by themselves will verify your eligibility for merchant cash advance and also help determine the amount of the advance.

High Approval Rate

Banks are careful lenders. The SBA is only a mediator. Your loan will be approved only after convincing the banks or brokers that you will repay each penny of the loan. The quantity of financial documents expected coupled with the lender’s watchfulness lessens the chance of your SBA loan request being approved. The economic slump has only added to the challenges of SBA loan hopefuls.

On the other hand, MCA providers are only concerned about your credit card receipts and the number of months the business has been running. Another advantage compared to SBA loans, merchant cash advance rules do not consider low FICO and former bankruptcies as rejection criteria for the application.

Repayment Flexibility and Little Risk

SBA loan does not come with the flexibility of negotiating repayment terms once it has been processed. The installment timetable is fixed and incurs serious fines on breach. Banks may cease and sell off your business assets. The same can also happen to your personal assets such as your home and vehicle can be auctioned in case of loan default, thus making SBA loans very dangerous in an economically weak environment.

Merchant cash advance comes with a flexible repayment schedule. Each month you are obligated to pay an agreed upon cut of your credit card receipts to the provider. Your repayment amounts fluctuate as when your business is flourishing, you pay more. When your business is going through a lean sales phase, the repayments become smaller and don’t stifle the business further. The possibility of failing to pay is very small.

Merchant cash advance impacts profit margins but is less risky

MCA repayments do impact profit margins to some extent. But on the other hand, defaulting on SBA loans can cause the closure of your business. Merchant cash advance offers a more desirable, low risk, and flexible financing choice relative to SBA loans. Save yourself from potential trouble by ensuring you give careful thought to MCA before submitting your SBA loan application.

A simple common sense solution will often be more effective than a complicated approach when businesses are faced with difficult financial circumstances. The critical importance for small business owners placing a high priority on “getting back to the basics” is exemplified by increasingly limited working capital funding options in the face of commercial banking problems.

The entire process of reviewing “working capital basics” will help businesses conclude how other commercial finance options are likely to be more effective in resolving their predicament than a traditional bank solution of taking on more business debt to resolve financial problems. (more…)