Why Merchant Advance Loans May be the Best Option for Small Business Owners

merchant advance loans

The introduction of merchant advance loans into the world of small business lending has no doubt caused traditional financial institutions to begin loosening some of their hitherto stringent lending policies especially as it applies to small businesses.  In spite of this change, there is still a huge gap in small business funding; one can only be filled by alternative lenders such as merchant cash advance vendors whose successes have continued to marvel lots of people. It is not surprising that lots of small business owners gravitate towards merchant cash advance and other popular sources of small business funding such as venture capital. For it has been estimated that around 57 percent of small businesses that have had their loan application to commercial banks turned down are willing to explore alternative lenders.

A glance at the available statistics reveals that there is more than 10 billion dollars’ worth of unfulfilled business financial needs for the sole reason that business owners are not often able to get all of the funds that they require. Although this shows this shows that the lending industry remains fertile, lenders are still unable to dole out funds to businesses for some reasons which are to be examined. But before that is done, one needs to have it in in mind that it is some of these constraints associated with traditional lenders that merchant advance loans seek to eliminate.

Most research findings on the issue of why small businesses have a hard time obtaining loans from commercial banks often point to three primary reasons. Insufficient collateral, weak business performance, and low credit score.  Looking at the issue of collateral which was said to account for 43 percent of the reason for rejection one finds that small businesses do not have fixed assets which are required in most of the cases. For such businesses, merchant advance loans should be a great alternative. As far as merchant cash advance is concerned the question of collateral does not arise nor does the issue of personal guarantees come up. Merchant cash advance providers bear all the risk associated with lending to the business while the business is even under no obligation to repay the advance for reasons that shall soon become apparent.

For the issue of weak business performance suffice it to say that this is somewhat general and has much to do with the recent economic crisis in the country. In spite of the fact that the country has managed to come out of recession, small businesses are yet to find their footing. During the economic downturn lots of small businesses,  those who now lean on merchant advance loans were being denied loans by commercial banks. Ironically, while lending to small businesses was down by as much as 20 percent, lending to the big firms went up 7 percent. But since merchant cash advance lenders only judge business performance from a single criteria—that of the volume of credit sales—small businesses that would have been referred to as weak by banks, but generate as much as $5000 in monthly revenue, are now able to have ready access to business funding. Finally, the issue of small business not meeting up with credit score requirements is firmly tackled by merchant advance loans providers since they require a much more modest credit score of around 500 as compared to the usual 650 of commercial banks.

How different is Merchant Cash Advance from a loan in the first place?

It is crucial for merchant advance loans to be distinguished from the conventional bank loans since this would help deepen one’s understanding of merchant cash advance. First things first: a merchant cash advance does not have fixed terms. There is no set repayment schedule. A business that defaults cannot be punished as would be done in bank loan transaction. The merchant cash advance industry is unregulated and hence free from government control, unlike bank loans which are quite the opposite. That the merchant advance industry is unregulated does not mean that merchant lenders can behave indiscriminately as well as randomly; indeed; there conventions that govern the conduct of merchant advance loans providers even though individual lenders are not under any obligations to abide by them.    

Because merchant advance transactions are business to business transactions, all laws such as the uniform commercial code and the fair credit reporting act govern the dealings of merchants and lenders. One other significant difference between a merchant cash advance and a loan is that a merchant cash advance does not impact on the credit score of the business since merchant cash advance lenders do not report clients behaviors to the credit bureaus. This is something that favors small business since it has been found that as many as 80 percent of borrowers do not meet up with the payment schedule. Other minor differences exist between merchant advance loans and conventional bank loans, but so far we have been able to establish that a loan and an advance are distinct and not even close.

Final Thoughts on Merchant Cash Advance

It might appear from our discussion that merchant advance loans are only suitable for businesses that have turned by commercial banks or those that are aware that they would not be considered by banks. It would be a misconception for one to hold this view.   For, in reality, merchant cash advance providers are seeking to be the number one choice for small business owners when it comes to the issue of funding. In this regard, significant success has been recorded since merchant lenders now lend hundreds of millions of dollars each year and the figure keeps rising. And although some persons still object to merchant cash advance because of its relatively higher cost, business owners who have utilized merchant advance loans in the past bear witness to its importance for small businesses of today. There is no doubt therefore that merchant advance has proved itself to be a true source of small business funding.

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