New construction loans are issued all the time to businesses that are seeking to set up new outlets or when they need to renovate their current structures. Before this time it was the commercial banks that were setting the pace in the construction lending industry. But for some time now the tides seem to have turned and for the first time business owners are looking beyond commercial banks for construction loans.
Regardless of what some few persons believe, this drift towards alternative sources of funding is going to continue. The reason for this is that banks have imposed more stringent conditions for issuing of new construction loans to business owners.
Businesses are now looking beyond commercial bank loans
Banks particularly view construction financing to be very risky hence the reluctance to grant loans to otherwise eligible business owners.
In spite of the fact that specialized banks—those focused on construction loans such as construction banks—seemed to proliferate, the reality remains that businesses do not have ready access to construction loans. The few business owners who are not aware of better alternatives such as merchant cash advance are still bent on obtaining construction financing from commercial banks. The result, of course, has been recurring disappointments.
For one study showed that there has been a general decrease in construction lending especially since the end of the recent economic depression, which left lenders and businesses in deep financial crises. Obtaining loans, particularly new construction loans have been very difficult despite the country managing to slip out of the economic downturn.
It might seem that the issue of decreased lending is one that is somewhat universal. However, that is far from the reality on ground. The facts on ground show that since the end of the 2008 economic recession, there has been a reduction of small business lending by as much as 20 percent. This is quite disturbing because construction companies form a huge portion of the industry.
In sharp in contrast to what has been happening to the small businesses, huge firms have experienced an upsurge of about 7 percent in bank lending. The issue on ground is that small businesses in need of new construction loans have not been having an easy ride. But while the situation might seem too bleak to an external observer, the situation has not been a totally helpless one.
The rise of alternative lenders
Alternative lenders which have come in different shades have risen to the challenge of making construction loans available to small business owners. In short, a new a problem of deciding which of this new breed of lenders should be patronized has arisen for small business owners.
At the present time, there are online lenders, factoring companies, and merchant cash advance providers all battling for to win the hearts of business owners; all wanting to be seen as the perfect alternatives to commercial bank loans. And in spite of the differences between all of these groups, there is something which they all have in common. When it comes to the provision of new construction loans to developers and businesses in general, they all seek to provide quick and easy to obtain construction finance.
Why merchant cash advance beats all other alternative sources of funding
However, despite their similarities, there is one alternative financing option that has come to be very popular among business owners—and that is merchant cash advance. Merchant cash advance has gained so much popularity owing, in part, to the way it tackles the problems associated with commercial bank loans.
Merchant cash advance providers unlike any other group of lenders have been committed to ensuring that much-needed business funds are made available to businesses in the shortest possible time. And when it comes to the issue of new construction loans, it has been the goal of merchant cash advance providers to remove the uncertainty involved in the process.
Business owners are well aware of the fact that the likelihood of obtaining construction loans is so minute that it might be acceptable for one to conclude that construction loans from commercial banks are virtually nonexistent. The uncertainty in the banking system is probably what led to the coinage “banks would only let you money when you don’t need it”. With merchant cash advance, however, such a pathetic situation is eliminated. Merchant cash vendors are there to provide business owners with new construction loans when they need it.
Is the cost of merchant cash advance justified?
Before delving into details of merchant cash advance, it is important for certain issues to be dealt with. The first is the contention that merchant cash advance is quite expensive, often resulting in annual percentage rates in the triple digits. Those who bring this issue to the fore seem to leave an obvious fact: that merchant cash advances are not secured by any means and that the lenders are hundred percent vulnerable.
It has always been a sound financial practice for the interest—in the case of commercial bank loans—to be somewhat proportional to the risk involved in a particular loan transaction. When it comes to new construction loans and merchant cash advance providers, the risks are maximal.
For even the traditional institutions that insist on collateral before issuing construction loans or loans of any kind still consider construction loans to be one the riskiest. In comparison, one can argue that merchant cash advance with its unsecured nature, and the fact that loans are issued to businesses that traditional institutions would normally consider not to be creditworthy, merits its cost.
How does merchant cash advance compare with online lending?
The second issue is that of alternative lenders that bear much resemblance to merchant cash advance. One such lender is the online lender. It is true that online lenders generally provide loans for a host of business purposes that could possibly include construction.
And it is also true that online lenders make loans available to businesses within the shortest space of time possible owing to their computerized underwriting mechanism. In spite of all these highs of online lending, there are still reasons why one should consider merchant cash advance ahead of online lending, especially when it comes to new construction loans.
The reason bothers on the fact that construction loans are almost not always provided at once—usually in stages. And because online lending is still very much at the juvenile stage it has often occurred that online lenders went of business leaving their customers in huge distress. But merchant cash has enjoyed several years of operation and is essentially a more stable option. Moreover, there is every reason to be skeptical whenever a business transaction is conducted face to face. Construction financing is so delicate that one would do well not to gamble.
A deeper look at Merchant Cash Advance
Coming to the option of merchant cash advance there is so much that can be said. The first thing, however, a business owner needs to know is that is not a loan. It does not bear similarity to a loan in certain areas. For one thing, a merchant cash advance does not attract interest payment. Meanwhile, there are no fixed terms in a merchant cash advance transaction.
That is, there is fixed payment period. In a typical loan transaction there is fixed period of payment and when the business defaults it is often penalized; and, when the business happens to pay earlier than expected, it is usually rewarded.
In a merchant cash advance transaction, however, there are no rewards or punishments of any kind. In merchant cash is a mere commercial transaction between two businesses—the one seeking new construction loans versus the merchant cash advance provider. Because it is a sales transaction in which a business sells a portion of its future receivables to a merchant vendor in exchange for construction finance, merchant cash advance transactions are not regulated by both federal and state governments the same way loan transactions are heavily regulated.
How it works and what the benefits are
Having differentiated between a merchant cash advance and a loan, it is time to examine how the process works. A merchant cash advance does not involve many complications as do commercial bank loans. The first thing is that the merchant cash advance agreement which the business has to sign before accessing new construction loans stipulates the factor rate. This is because it is what determines how much the business gets to pay back in total.
The other thing is the determination of the percentage of the daily percentage of the business which will go into the payment of the advance. Once the factor rate and withholding percentage have been decided, the contract is sealed and cash is made available to the business almost immediately.
Afterwards, the business commits itself to making daily payments according to the agreed formula until the advance is paid in full. Simple as it is, there are significant benefits that come with merchant cash advance. The main benefits that come with merchant cash advance are speed, no requirement for good credit score, minimal paperwork, no interests to be paid, and above all, a high approval rate in the neighborhood of 90 percent.
In the beginning, we stated that banks used to be the leading source of new construction loans for several years. In recent times, however, there has been a shift towards alternative finance, and merchant cash advance in particular. Although there is the contention that alternative financing is more expensive it was shown that the benefits business owners derive from merchant cash advance in particular probably outweigh the cost. This is something which an increasing number of business owners now acknowledge. As a result, the MCA industry is expected to keep growing.