A Merchant Cash Advance (MCA) can provide business borrowers with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, weekly or monthly basis until the obligation has been met. An MCA is not technically a small business loan and as such MCA's are not limited in what rates they charge or what terms they establish and therefore often have high interest rates. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity and need financing quickly.
Conventional loans are the most common type of lending for small businesses. They provide short-term, intermediate and long-term funding for businesses. Rates differ between each lender and depend on the overall credit risk of the business applying for the loan. The interest rates charged can either be fixed for the term of the loan at the time of closing, floating (for example the rate may fluctuate with the “prime rate”) or perhaps the loan will be fixed for a period of time and then float. A higher perceived risk will generally result in a higher interest rate. The monthly payment of conventional loans will generally include both interest and a principal reduction payment (commonly referred to as amortization). The amount of the payment is determined by the rate and term of the loan. Some loans are structured so that the monthly payments will completely repay the loan by the end of the term (also referred to as a self-amortizing loan) while other loans may be structured so that there is a balance remaining due at the end of the term (called a balloon payment). The latter will require the borrower to either refinance the loan at the end of the term or repay it from other available funds. Payment schedules, which are normally monthly, can be changed to quarterly and even annually if needed and agreed upon by both parties. Some entities looking for startup, transitional or construction financing can even enjoy interest-only payment structures.
These loan options differ from the programs provided by the U.S. Small Business Administration (SBA), which are guaranteed by the federal government. Conventional loans are not guaranteed by the government. For this reason, banks tend to make conventional loans to businesses that are considered lower risk and use the SBA and other government programs for loans they consider higher risk.
What Makes Them Different? Merchant cash advances are classified as commercial transactions, not loans. Here are the distinguishing characteristics of merchant cash advances:
No Fixed Terms. Providers estimate the term for repayment based on the business’ sales history. The customer is charged a set fee, referred to as a factor rate and there are no interest charges.
Cash Advances Are Unsecured. The provider does not receive any collateral or guarantees, accepting all risk of the client going out of business.
Minimal Documentation. Often, a client can simply provide six months of processing statements, two months of bank statements, a copy of a mortgage statement or property lease, and a driver’s license.
No Fees. There are no late fees or penalties attached to the product.
Fast Approval and Funding. Most cash advance providers can approve and fund an application in 2-7 days, LVRG can get you funded in less than 1.
Daily Repayment. This varies according to the volume of the merchant, and changes according to the business cycle. The provider receives a set percentage or amount of the merchant’s daily card settlement batch.
In a perfect world, Tim P. an ambitious 38 year old who is about to expand his small business, will enter his local bank, present the banker some of his great achievements and goals, and walk out with a fat check with a 6% interest rate, all in a matter of days. After all, Tim’s been a good customer for the bank, his sales have consistently gone up, and that’s what banks are for, right?
Wrong! The reality is, however, Tim will barely get time to see an attentive banker after a long wait, and even if he does, Tim will find out his credit isn’t perfect, his cashflow projections are not stellar, or will face an endless list of supporting documentations to provide. Hypothetically speaking, even if Tim was approved for a traditional bank loan, it will most likely be months (1 to 8 months) before seeing a dime loaned out to him from a major bank... that’s assuming Tim has roughly 20%-30% sitting around in cash to inject into the loan facility and he's willing to put up his home, life insurance, wife & kids, as collateral on the loan. Of course, there are those who can benefit from the system, but there’s no doubt that major banks are more interested in doing business with multi-million dollar mid-sized businesses rather than a local brewery, coffee shop, restaurant, or retail store. As Bob Hope said, “A bank is a place that will lend you money if you can prove that you don't need it."
Tim really doesn’t want to forgo the opportunity to expand on his expansion ideas for his small business. That corner spot for that price is not going to last long. For many small business owners as Tim, with the talent to capture opportunities but not enough scale or financial trek record in major bank standards (less than one out of five small businesses are approved for loans), alternative financing is what bridges the gap.
Small business loan resources in the alternative funding space, such as LVRG Funding are in the middle of this spectrum, catering to growing small businesses, with a focus on efficiency and moderate risk taking. After a simple screening of bank & credit card statements, and a one-page application, Tim is ready to put that $100K into good use, expecting a two, three, or five-fold return from his expansion. In other cases that require short-term loans quickly, such as to pay for the cost of goods (have a big deferred payment contract, for instance), small business owners jump through significantly fewer hoops with reliable alternative financing companies.
Simply put, alternative financing small business loan options promote market efficiency by offering capital with relatively ease to shrewd small business owners, allowing them to drive their businesses to the next level. Clearly, each business has different needs, and it is extremely helpful to seek out for various options. Some may be better off with traditional banking, and others, not so much. As for all the Tim’s out there fueling the “real” economy, alternative financing from LVRG is the less hassle, reasonable, and sustainable option that fills the void. LVRGFunding.com