Many small business owners are unable to obtain traditional bank loans because they have insufficient credit or collateral. As a result, more and more have been turning to Merchant Cash Advances for infusions of working capital or other immediate cash needs.
It advances cash to merchants based on anticipated future sales, offering an alternative to the traditional bank loan. With a Merchant Cash Advance – which is not a loan – businesses receive a lump sum in return for a percentage of their future revenue.
First of all, qualifying for a Merchant Cash Advance is far easier than a bank loan. No checks are ever written and there are no late fees, hidden fees or interest rates. In addition, there is no loss in equity or need to post collateral to secure the advance.
Once you submit an application with your last 3 bank statements a consultant will go over how much money you qualify for based on your average monthly sales volume. If you agree to the terms, you will then receive a contract spelling out the specifics of the agreement. After signing and receiving a funding phone call, the funds will be deposited in your bank account as early as the same business day. In return, we will collect a small, agreed upon percentage of your daily revenue until the terms of the agreement are satisfied.
Most businesses will qualify. Generally, all you need to show is that you’ve been in business for over 2 months and have at least $4,000 a month deposited into a business checking account on average for the past 3 months. How long will it take to find out if I qualify? Pre-approval on our website takes about 90 seconds. Funding takes one to two business days depending on the amount of the transaction and if the merchant is cooperative.
Once the funding call is completed, the money will be received as early as the same business day.
The average size of our business cash advances are about $25,000, although our business cash advances range from $1,500 to $3 million.
You are free to use the money in any way you feel is best for your business. Many of our customers use it for expansion, advertising, new equipment or increased (or seasonal) inventory. It is also frequently used for unforeseen emergencies or to buy out a partner or acquire a new location.
Business term loans are relatively straightforward loans that are granted in full upfront by the lender. They’re specifically offered to businesses, but are basically the same as other familiar term loans like car loans, mortgages, student loans, and many personal loans. The funds are usually made available in a few days to one week. The loan is repaid, along with interest, in fixed monthly payments over an agreed-on period of time. Typically, short-term business loans are repaid over one to five years, and long-term business loans are repaid over five to 10 years.
Not all business term loans are the same, obviously. Loan amounts generally range anywhere from a few thousand dollars to several million. Your company’s revenue, length of time in operation, and your personal and/or business credit score are key factors in determining how much a lender is willing to offer and what the interest rate will be. The annual percentage rating (APR) usually starts around 5.9% and can be much higher depending on the risk involved.
The funds acquired in a business term loan are most often applied to significant immediate expenses. These would be costs like equipment upgrades and purchases, a large inventory order, office renovations or expansions, new hires and associated payroll obligations, and business expansions.
These loans are primarily for businesses that have been profitably operating for at least a year. Repayment begins right away, so if you need more flexibility in this regard, another option like a business line of credit may be more appropriate. Also keep in mind that collateral may be required for a business term loan depending on the lender and the situation and the amount you need to borrow.
Banks and credit unions are the traditional lenders. They typically offer lower interest rates but have more strict qualification requirements than online lenders—the other option. Online lenders may offer more convenience and flexibility, such as even smaller or shorter-term loans. Application processes vary between lenders. At SBF we have a much higher approval rate and require much less as far as documentation than traditional banks and credit unions do. Our rates and terms are also very competitive and SBF are much faster to approve term loans and fund merchants than credit unions and banks.
With this type of LOC, a business must pledge assets as collateral to secure the loan. Since a Line of Credit is a short-term liability, lenders will typically ask for short-term assets, such as accounts receivable and inventory. Lenders typically won’t require capital assets, such as real property or equipment, to secure an LOC. If the borrower is unable to repay the loan, the lender will assume the ownership of any collateral and liquidate them to pay off the balance.
This type of LOC does not require assets as collateral (meaning it’s sometimes a more attractive option to business owners). Still, the lack of collateral means a higher risk to lenders, so to get an unsecured LOC you’ll need stronger credit and a positive business track record. In addition, the interest rates are often slightly higher. Unsecured lines are usually smaller.
A term loan involves a fixed amount of funds loaned out and repaid over a fixed time period. The business owner takes the proceeds from a term loan in one lump sum. A term loan is repaid in a prearranged schedule of payments that stay constant until the loan has been repaid. The funds from a term loan typically go to purchase a specific asset, like a building, a vehicle, or other equipment that is valuable to the business. A business line of credit is more flexible. With an LOC, businesses are given a credit limit they can borrow against whenever they need it, and they’re free to spend the funds on the costs of their choosing. Businesses then make regular payments that vary according to the current balance of the credit line, like a personal credit card. While term loans work well for paying for long-term assets that will be used over many years, LOCs are best for short-term operating purposes and for more immediate revenue-generating activities because the business owner can access funds as he or she needs them.
When you open a line of credit, you’ll receive access to a stated amount of funds to use as needed. You then receive a monthly invoice reflecting the amount of credit you’ve used, along with any interest charges. Your payment is based on the actual interest accrued on these funds while you use them. Once the funds are repaid, that amount is available when you need it. You’re only charged interest on the amount of the loan you actually use. LOC rates and limits are set by lenders and based on your risk grade, your collateral, and any servicing requirements. Your risk grade is judged on factors like the financial success of your business, the state of your business sector in general, your business and personal credit scores, and whether or not you have collateral. Most lenders will charge an annual fee for the LOC, in addition to interest charges. If you’re going to need a significant number of loan advances and repayments, transaction fees might apply. Smaller LOCs (under $100,000) can operate like a credit card account, with advances made by using a credit card or writing checks issued for the account. Accessing the funds can also be deposited directly in the borrowers account via an ACH deposit.
If your business regularly requires funds to cover short-term cash flow issues, manage your business’ day-to-day needs, or take advantage of immediate business opportunities, then applying for an LOC makes sense. Here are a few examples of situations in which it’s smart to get an LOC:
A seasonal business that generates most of its sales in the summer could use an LOC in the off-seasons to help cover overhead or meet payroll. The LOC would allow them to maintain normal business activities even as their income fluctuates.
A business could use an LOC to finance a marketing campaign, which would attract new customers and expand sales. The new debt will be paid off quickly because the campaign will generate additional revenue and grow the business faster.
If your business needs to cover expenses while waiting for clients to make payments on sales you’ve made with terms, then an LOC could be useful for cash management.
If you have a new business without an established business credit profile or have a low personal credit score, traditional lenders will typically be reluctant to offer you a line of credit. But at SBF we approve many businesses and we have no minimum credit score needed to qualify. Most lenders prefer to offer an LOC to established companies with a track record and revenues to support the more flexible financing provided by the line of credit.
Most major banks that serve small businesses—which include commercial banks, community banks, credit unions, and online banks—offer unsecured business LOCs. The credit limits at some banks are $5,000 to $100,000, while other lenders will go as high as $500,000. At SBF our qualifying for a LOC is much easier and only takes a few minutes so we offer up to $100,000 for an instant LOC approval but can go much higher with full manual underwriting. All lenders will usually only consider “established” businesses that are at least 2 years old and have a positive track record of growing revenues and profits. At SBF we offer approvals to merchants for lines of credit as young as 2 months old.