Small businesses depend on cash flow for success as much as any large business. The major differences between the locally owned shops around every corner and the national retail chains are the scale of the capital requirements and the methods available to secure funding. Mostly businesses depend on collateral-based lending sources. However there is another source that didn’t require any collateral to place as security, called merchant cash advance.
Merchant cash advance is one of the most popular funding programs that small business owners are using to overcome their financial problems quickly. Normally, the ability to make quick decisions with fewer delays and management stages are some of the factors that leaded small businesses to success; however the shortage of assets and resources to pledge for capital requirements every so often results in cash scarcities at some point of expansion, recruiting or slow seasons.
Many small businesses that fail are caught only a month or two away from the end of a down season or impermanent drop in sales. With the creativity behind the cash advances, the load of a traditional loan is replaced by a repayment plan immediately related to sales.
Available Cash Flow with Cash Advance
Cash advances aren’t a loan. It is the process of borrowing against the future credit card sales and is repaid at a pre-agreed percent of every transaction. The process of using the system to get access to cash without impacting credit scores or needing the pledging of assets for collateral is one of the quickest developing sources of funding throughout the lending industry.
There is no regular monthly payment required throughout the repayment of the borrowed amount, and the repayment system is ideal for businesses that have peak and slow seasons.
Differences between Term Loan and Cash Advance
The two business funding types could not be more different. On one side, you have the extremely less expensive yet difficult to qualify for term loan. In the other corner, you have the extremely accessible yet hard to afford cash advances.
The term loan and the cash advance represent the most conventional and the least conventional business funding options. Term loans have been around for a long time, whereas cash advances are newfangled.
Which Is Better A Term Loan or A Cash Advance?
It’s time to decide if either one of these business funding options is the right option for your small business. Does the term loan affordability or the cash advance accessibility sound like something what your small business actually needs?
Even if this sort of alternative funding options sound excellent, knowing about all your funding options before you sign the lending contract is essential. Additionally, term loans and cash advances are two different types of funding program, you will want to check out which suits you best for your business needs.
Best Uses for Merchant Cash Advances
- Short-term cash flow
- Purchasing inventory
- Unexpected expenses
- Paying due debts
How the Factor Rate Is Calculated?
The interest rate a business can pay on a cash advance is calculated differently from a conventional loan. Interest rates tend to be higher due to the short-term nature of the cash advance and the added risk the merchant cash advance lender is taking on. If a business is looking for a merchant cash advance of $10,000, the cash advance lender can also use a factor rate of 1.20x, and would require a final purchased amount of $12,000 to be repaid.