Many smaller and medium sized businesses are stretching to make ends meet, and this is where the concept of a small business advance comes into play. Many businesses have been locked out of traditional business financing as those avenues have been restricted or shut down due to the bigger lending restrictions and tougher approval standards.
Alternative lending sources have popped up to fill the space. Many of these are small business cash advance lenders. These “advances” are not technically loans but are regulated as “advances” against future credit card receipts. Usually, these cash advances are marketed to those businesses who may not be able to get conventional bank financing and need money quickly.
While this certainly may be many businesses in a difficult retail economy, what merchant lenders don’t always say is that these unregulated business advances often come with requirements to switch credit card payment processors, interest rates that are variable and in excess of 50%, and high upfront fees just to apply.
Additionally, many cash advance lenders also will take a daily percentage of sales as payments for their short term loan. Because they regulate the processing, they are able to require this percentage as yet another requirement of getting the advance. State usury laws do not typically apply to cash advances, only loans, so cash advance companies are able to require high levels of interest legally. The upside with these advances is that they can work with a much wider variety of credit scenarios than a traditional bank loan and a business normally gets the money much quicker.
Other alternatives to the cash advance have also cropped up recently as well, and have blended the best attributes of the cash advance while removing some of the more costly requirements. One of these is known as CCRF, or credit card receivable financing. This is a true, regulated business loan that has rates which are approximately 50% less than a merchant cash advance. However, as an alternative financing source, this type of loan can work with a wide variety of credit scenarios that would not be considered by a commercial SBA-backed type loan. Additionally, there are no upfront fees or stipulations to switch credit card processors.
As it turns out, the small business cash advance, while convenient, may not be the best way to go as new alternative business loan {sources| have come on the scene that build on the positive aspects of this product, such as convenience and underwriting flexibility, while removing the some of the more difficult aspects, such as high rates, fees and difficult funding conditions.
Neal Coxworth is an entrepreneur and a 17 year veteran of the consumer credit industry with experience in originating, underwriting and processing mortgage, student and consumer credit loans. He publishes an informational blog for consumers to provide insight and analysis to all major loan types as well other topics such as credit history, that most consumers will face.
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