What is Alternative Loans vs. Merchant Cash Advance

Why choose Alternative Business Loans or Merchant Cash Advance?

In essence, despite Merchant Cash Advance (MCA) having known for having a higher rate than Alternative Business Loans, both somewhat have similar rates. They tend to differ in the kind of transaction, the risk lenders are ready to offer, and the contract’s language and wording but both considered as an alternative to traditional business loans through traditional means.

You might be wondering why entity owners prefer borrowing through alternative lending as opposed to traditional sources like banks or credit union or commercial banks. Entities can produce revenue or income from MCA compared to not borrowing. Alternative sources of funds have been the go-to funding source for non-bankable businesses, and for less-primed credits.

Why would a borrower pay higher rate? Well, lenders would not be there without borrowers no matter what type of funding it is, the market dictates. As much as borrowers are and a need exists, lenders ready to take risks will always be there commensurate to the risk they take. Let us look at how merchant cash advance (MCA), alternative term-loans and payday loans differ. Higher default means higher risk for lenders.

Alternative business loans & Merchant Cash Advances 

Most business owners recognize MCA as the best financing solution if traditional bank is not an option. MCA has benefited numerous entities during growing pains, and even during cash flow problem for it’s ease and convenience without having to go through hoops for a quick working capital funding.

You may know how risky it can be to finance sub-prime credit. The amount of risk sometimes outweighs the interest you will need to pay. Yet, do you know there are other alternative business loans with more significant benefits? Let’s now explore these alternative benefits.

What are Business Loans

Companies need sufficient capital for operating expenses or funding their expansion. Hence, businesses take loans to get the necessary financial support. In that case, we can define a business loan as the debt a company is bound to repay under the terms and conditions of that loan no matter the sources.

Typically, you can get business loans from a credit union, private banks, or bank or other means. These loans are not only best for businesses needing immediate cash as the requirements can be overwhelming. Settling for unexpected urgent expenses might not be suitable as your need will surpass the time to get an approval. Therefore, business loans are the real deal if you require funds for an upcoming project that can wait. For long-term business growth with proper planning, traditional business loan is ideal. However, you must have your financials organized. Traditional lending sources will not fund businesses without tax returns, financial statements, projection, or budgetary plans in place.

Processing a business loan may take even 12 to 18 weeks including SBA. This is based on how long it will take to meet the loan requirements and approval. If you need a business loan, you will not only guarantee personally, but they’re also placing a blanket lien for all your assets including personal assets. Having a bad credit history is matter of concern for traditional banking, too, which will almost automatically disqualify you instantly. Nevertheless, you may pay higher interest rates on alternative loans, but these requirements sometimes outweigh the need for good financials and good credit.

Merchant Cash Advance is the quickest way to access working capital vs business loans

Merchant Cash Advance (MCA) is the quickest way to access business funding with the least amount of constraints. It involves exchanging a significant amount funds in return for a part of future sales or revenue. You borrow funds in hope that your revenue will sustain its ability to pay. Therefore, payments are based sales and a percentage is deducted to repay your advance terms. They are based purely on your sales in hope that it will generate business revenues as to not strain current cashflow while making payments. Payment can vary from daily to weekly to bi-monthly with a term of no more than 18 months.

Alternative Loans VS. MCA: Advantages

Alternative business loans offer access to various programs from private lenders, including online non-banks lenders. Furthermore, there are several loan options with low-interest rates, even for loans without collateral other than MCA, such as a line of credit. You have the freedom to borrow any kind of business loan, whether short-term or long-term if you qualify. Most borrowers expect terms of up to 5 years, however depending on the preference of the lender and their credit appetite, these types of funding are reserved for well-qualified borrowers.

Another reason borrowers prefer alternative loans like MCA is its convenience and flexible repayment options. This implies that you can repay your advance easily and quickly with the ability to borrow again quickly. Their effectiveness lets you figure out a repayment plan that suits your business perfectly based on your current cashflow. Business loans provide more straightforward repayment options, but it must meet debt-to-income ratio and other debt burdens like personal loans, equipment finance and other asset-based debts can hinder your abilities. Relative to MCA, these debts aren’t considered in the decisioning. A business loan is a perfect option if you need funds for long-term expansion and growth, but for short-term low-doc funding, alternative loan like MCA is must easier, faster, and more convenient.

One of the significant advantages of MCA is the quick funding which mostly takes 24 hours to be approved. You do not need collateral for cash advances, and they offer a higher credit limit than most credit cards. However, they payback term are much shorter than traditional loans. Also, they have flexible repayment from weekly, bi-month or daily to ease the burden on the cashflow, and you have the freedom to use the funds on whatever you need. MCA is mainly designed to assist growing or struggling companies in need of funds now.

Traditional Loan: Disadvantages

Traditional business loans necessitate too much paperwork before loan approval. In addition, there are specific requirements that one must meet to qualify for the loan. You may be required to wait several months before receiving the borrowed money.

The primary disadvantage of MCA is its interests however just like going to 7-11 you pay more for convenience. You may pay a significant amount interest rates or fees but the time to access capital can take day not months. Having capital today matters most that having lower rate for a loan that might not happens for months.

Why never to use Payday Loans for your business.

Payday loans are short-term cash advances involving small amounts of money but not designed for business owners. This kind of loan makes borrowing and access to cash easy. However, they’re not appealing to business owners. These loans may come in handy during unexpected emergencies. Nevertheless, people tend to take payday loans to address repetitive expenses like medical bills, food, utilities, or rent.

Mainly, lenders of payday loans operate through internet sites, street shops, or storefronts makes it easy, but it can be a trap to avoid. They tend to advertise through mail, online, radio, or television. This targets individuals who may not navigate paycheck to paycheck. The borrowers have poor credit and no alternative money source for urgent bills.

Disadvantages of Payday Loans

1. They are expensive due to the high-interest rates.
2. These loans can be financial quicksand as you can easily be trapped in the debt cycle.
3. Some lenders are ruthless when collecting debts.
4. Lenders can access your bank account, which may result in bank overdraft charges through several withdrawal attempts.
5. They have a short loan repayment period.

Final Thoughts

Supply cannot exist without a demand. Companies are willing to pay higher rates considering the benefits they will reap from having capital accessibility. Alternatively, for businesses not willing to pay high rates of loans have the following options: go through all the hoops going through traditional lending, or struggle while waiting for the best loans, go out of business, opt for personal assets liquidation. Having operate capital is a lifeblood for most businesses. You also have an option to cut costs. Whatever the choice, most alternative funding options do not incorporate personal assets. This is because such fundings are unsecured outside your assets but purely based on your future ability to pay through your future sales. Without sales there’s no revenue therefore abiding by the term’s ability to pay is diminished.

With a business loan, you can meet various needs without draining your cash flow or tapping into your cash reserves. Also, sometimes not borrowing is the worst decision as most wait until they can’t afford to decide to borrow but at this point your cashflow will already show degrading revenue and it’s a catch 22. Like the old saying, borrow when you don’t need it. Waiting until you’re desperate will only hurt you and your business. Hence, you can come up with a working plan to make sure you don’t wait last-minute. By comparing the various sources of funding, you can now make the most suitable choice for your business.

To see your MCA funding options without affecting your credit. Get a quote instantly through our online payment calculator.