Will A Merchant Cash Advance Be Advantageous For Your Small Business?
Financial reports indicate that small business loans for bad credit approvals through a bank are at a measly 27%. That means that almost three quarters of small business owners who are looking to expand to increase their profits, but have a bad credit history, are being turned away at an alarming rate.
A number of small business owners plagued with bad credit have the recent financial crisis to blame. Yet, banks are still relying on antiquated means of scoring credit, putting these businesses in a category of being too risky to risk a loan.
What is a Merchant Cash Advance?
The banks’ reluctance to recognize their possible role in the small business owner’s bad credit history and work towards helping amending it has opened up a whole new way to reap in the cash for merchant cash advance providers.
In the last two years, over 50 merchant cash providers have joined in the burgeoning industry of offering advances to small businesses, taking their payment directly from credit card sales or an adjustable ACH payment directly from their business account. This service is being offered to businesses where credit card sales are dominant, such as restaurants and retail stores and more recently to those businesses that do not accept credit cards.
The face value of this offer may seem promising to the owner, whose search for small business loans for bad credit has yielded nothing. The business cash advance company offers a lump sum payment and in return takes a share in any future sales. Since the principal and fees are being deducted based on the sales made, the small business owner feels the benefit of lower payments when sales are down.
So What’s the Catch With Small Business Loans For Bad Credit?
To skirt any issues with regulators who monitor interest rates charged by lenders, merchant cash advance companies prefer if their service is not referred to as a loan. Instead, it is a “purchase and sale of future income” at flat cost of capital of 30% or more. This is a substantial hike from the interest rates you will find on a typical small business loan or even a line of credit.
In order to remain underneath the regulation radar, a few of these cash advance providers are attempting to adopt fair business practices with their small business clients. This is being accomplished by not extending offers to businesses where the repayments would cause their demise. Yet even those few companies who are acting responsibly admit that not all are and have taken to try and regulate this new industry themselves, before the Feds decide it’s time to.
Who is a Merchant Cash Advance Good For?
If you are searching for small business loans for bad credit in order to pay last months bill and stay afloat, this may not be the solution. Dipping into your sales and at a high interest rate to make payments will only disturb your financial balance (cash flows) further.
If your small business is on the rise, and you are searching for ways to expand it, then you may consider a merchant cash advance but do your homework first, and take the time to find a merchant who is charging an interest rate which is comparable to a banks. There are even some who have now adopted a more traditional payment method, where you make regular monthly payments.
Since 2008, the lending industry has changed drastically. “Safe” banks are more stringent on their lending guidelines, leading to big opportunities for other types of alternative lenders who will take the risk of providing small business loans for bad credit, but for a price. Review your circumstances and options very carefully before jumping into a new small business loan that does you more harm than good. This type of alternative financing does make sense when used correctly and often enables a small business to grow and eventually move away from this alternative loan product toward more traditional financing.