We are in an era when banks are turning away business owners due to tight credit, so the merchant cash advance style loan is gaining popularity, despite the fact that these loans usually cost a great deal more due to much higher interest charges. Business or merchant cash advance loans are a valuable resource for some business owners who find themselves in a tighter commercial credit market with shrinking or canceled lines of credit from banks – plus the intense financial challenge of an historically severe recession and credit crunch.
But in 2010 – as the market for business cash advance loans is expected to see phenomenal growth – the government is in the middle of its own effort to enforce more stringent regulations on the financial industry. So in the coming months it will be interesting to see whether the cash advance industry – which mainstream lenders and big banks often complain about because it is not very well regulated – will be given new guidelines to follow.
As a typical example based on actual loans made by cash advance companies in recent years, borrowing $30,000 might cost $10,000 in future repayments through card sales. But although that is a very steep rate of interest it is sometimes the only game in town for a business owner whose bank will not offer them a line of credit or other form of loan to help them raise the cash they need to run their operation.
For many business owners the choice to take out this kind of more costly loan comes down to a simple calculation. They can forego the business cash advance loan because it costs too much, or they lose a lot more business or even face the possibility of having to close their doors or declare bankruptcy. Sure, they would love to borrow elsewhere for a fraction of the interest paid. But if nobody else will give them a loan they have limited options and then a cash advance business loan starts to look attractive.
Using our example of a $30,000 that costs $10,000, for instance, a business owner might have to pay $10,000 but if doing so enables him or her to stay in business and make a $50,000 profit then they still come out ahead by $40,000. Or if they are having a really bad year due to the recession, they might wind up just breaking even. But they can stay afloat and when the economy turns around the expense of $10,000 to keep their business and avoid a foreclosure or bankruptcy might look like a really good bargain.
Some might call a pricey business cash advance loan the lesser of two evils – but when an entrepreneur is faced with hard choices then sometimes paying more to stay in business makes sense and can be justified in a number of different ways. You do what you have to do to survive, and if you can get past those major financial challenges then you have an opportunity to keep the business going for another season. Manage it well and with a little luck surviving can evolve into thriving, which is why many business owners who have used cash advance loans would not hesitate to do so again if the circumstances required it.
In the meantime most of the major players in the business cash advance industry are not waiting around to see what happens in Washington, but they are starting to take the matter of regulations into their own hands. Whenever an industry is threatened with tighter rules and regulations it is generally best for them to be proactive and start setting their own standards and policing themselves. That can convince regulators and legislatures to back off, and that is why this year we will see more and more changes in policy at business cash advance lending companies.
They will likely put limits on how much they charge their customers, and some are already taking steps to minimize the cut of profits or revenues that they require from certain businesses – like the grocery business – where owners typically operate on very thin profit margins. That all spells good news for the consumer, because whether the industry starts to adhere to more reasonable guidelines on its own or through official regulation, it will make the loans more affordable for business owners.
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1.Check References and Study the Terms
With any kind of loan you should only work with those companies who have a stellar reputation as fair and legitimate lenders, and they should have verifiable references and a solid track record. If you’re considering a business cash advance offer that looks too good to be true then you probably need to study the loan agreement more carefully because no loan – not matter what kind it is – is a steal.
Having said that, the business cash advance does have some distinct attractive features, and one of those is that the entire loan application process is usually simple, user-friendly, and free some headaches and underwriting nightmares that you may have encountered with a loan from a major bank.
In fact you should not expect to pay any upfront fees or closing costs when you do a cash advance merchant loan, and you should not have to put up any inventory, property, or equipment as collateral on the loan. If your lender asks for those then you should probably shop around for a better business cash advance lender who offers more reasonable terms and no out of pocket upfront costs.
2.Use Business Cash Advance Loans Carefully and Sparingly
Instead of paying installments like other loans, you are agreeing to pay out a percentage of your future income or sales. There is also no collateral to put up to backstop the loan, because the lender does not ask for collateral but instead requests a cut of your future business profits or revenues in the form of credit card payments. That is one of the benefits of a cash advance loan, but it is also one of the reasons that you should be very careful to use these loans only when you absolutely need them. The payment is coming right out of your future business revenues, and if you are not prepared to sacrifice those to get the cash you need then you should reconsider your plan to borrow.
The interest rates charged on these loans are also much higher than the rates businesses normally pay at banks, so signing up for a business cash advance loan means you are going to pay dearly for the money. That might be fine if you cannot operate successfully without the cash and nobody else is willing to give you a loan. But just keep that in mind and do not use this kind of high interest loan casually or it could wind up costing you more than it is worth. Use this kind of loan mainly for urgent times or emergencies because if your profit margins are slim this kind of loan might be hard to manage, the same way that any debt can be a burden if you aren’t careful.
3.Shop around and Compare Deals on Cash Advance Loans
It always pays to compare lenders, and with so many business cash advance lenders advertising on the Internet that may not be too difficult. Just go online and check out a few lenders, compare their interest rates and terms, and see which ones are offering the most attractive loans these days. Pay special attention to the interest rate or amount of money you’ll pay for the cash advance, because that is how most lenders make their money and the higher the fee for the money, the less of a deal it is for you as the borrower. Be a wise shopper and don’t fall for advertising hype but instead pay close attention to the small print and the real nuts and bolts of the loan application and lender agreement.
4.Crunch the Numbers and Seek Advice if You Need Expert Help
As with any financial transaction, of course, borrowers should should have an attorney or other financial expert review any legal documents before signing. Trust your gut and also double check your math. You want to be able to borrow your cash advance loan at a cost that will enable you to make more money in the long run, not go deeper into debt.
So, for example, if you can buy a delivery truck for $15,000 and use it to increase your profits this year by $15,000 that means the truck will pay for itself in one year. If you have to pay $5,000 to get a cash advance loan to go out and buy that truck then you’ll probably break even on the loan and the truck purchase within a year and a half, and that is probably a great investment.
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Those who own businesses are interested to know the basic characteristics of these unique loans, and three of the most common questions that they want answered are covered below.
1.What is a Business Cash Advance Loan?
As its name suggests the business cash advance loan is an advance in cash paid to a business owner based on their projections for future revenues. In other words the lender determines how much money the business will make over the next several months and then offers to make a cash loan in exchange for a cut of that future business income.
The loans are repaid by designating a share or percentage of the business owner’s sales and that is typically done by guaranteeing the lender a portion of the money made from credit card receipts. If you take out a loan this month, for example, you might repay it by giving the lender payments that are a percentage of your credit card sales over the next few months.
Because you are paying based on a percentage and not a set payment amount, if you record higher sales you’ll pay back more of the loan – but during months that your credit card sales are less you will be paying less money to the lender.
2.How Do Business Cash Advance Loans Differ from Bank Loans?
There are two aspects of business cash advance loans that make them especially unique and different from your typical commercial business loan.
• One way that a business cash advance loan differs from your typical bank loan is that there is no fixed repayment schedule – a feature that is always found in conventional commercial loans. So in other words you don’t have to make payments each month in equal installments like people are accustomed to doing with car loans and mortgages.
• The second big difference between these loans and mainstream bank loans is that the cash advance loan industry does not have to follow the same legal guidelines that banks and other traditional lenders do. So merchant cash advance loans are not regulated by the government or the banking industry the way that other commercial loans are.
That has created some resistance from the traditional banking and loan community, because they feel that cash advance loans should also be subject to the same kinds of regulatory oversight and scrutiny that their own lending practices must adhere to and follow. Because cash advance business loans operate in a rather unregulated environment, some lenders charge very high rates of interest. It is not uncommon for a business cash advance loan to cost the business owner interest that works out to more than a 100 percent annual percentage rate or APR – and some lenders will even charge 200 percent APR.
That would never be allowed with a typical bank loan, but for lots of business owners who have been turned down by banks these cash advance loans are useful and helpful, despite the high costs.
3.Are These Loans Here to Stay or Just a Product of the Recession?
The idea of cash advance business loans is relatively new, but it started before the most recent recession and has been part of the lending industry since the beginning of the 21st century. These days, of course, because of the credit crisis and the inability for many businesses to find financing the niche for merchant cash advance loans is growing rapidly.
There are dozens of companies who now make these loans across the USA, and it looks like they are definitely here to stay because they are doing a brisk business because although they carry high rates of interest they are relatively hassle-free and easy to get loans that can be processed fast and get business owners the cash need with hardly any questions asked.
Currently cash advance lenders constitute what some experts estimate is about 10 percent of the market for commercial loans to businesses, and that figure is expected to either stay steady or continue to grow. The one wild card or variable that could change those projections is if Congress decides to start regulating the cash advance sector the way that banks are governed. There are lots of new financial institution regulations coming down the pike this year, but it is unlikely that those will impact the business cash advance industry anytime soon.
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Whatever the reasons are for businesses to need cash, many find it hard to do it through conventional banks and traditional lenders – especially these days. So instead they are turning to special merchant cash advances or what is commonly referred to as a business cash advance loan.
With the influence of the 2008 and 2009 credit crisis still sending shockwaves through the economy, many businesses find it much more difficult to get the loans they need to continue smooth operations. Some need fast cash to take advantage of bargains and make strategic acquisitions of property, sign leases on stores or warehouses, or invest in new inventory and equipment to prepare for improvements in the economic outlook. Others just want to make their payrolls on time or cover their short-term expenses in order to stay afloat or avoid penalties and interest charges and dings on their credit reports. A merchant cash advance loan can potentially solve all of those cash flow problems without the hassle of applying for a conventional bank loan and without the difficulty of getting loan approval. Those who do this kind of business cash advance loan often find that it is a faster, simpler, and easier way to get the money they need.
The way a business cash advance loan typically works is through an arrangement based on the company’s future sales. Most of the time the lender agrees to provide the cash loan in exchange for repayment that will come from a percentage of the business’s credit card receipts. That kind of credit card payment plan eliminates the need for the business owner to put up other forms of collateral such as mortgage documents, pledges of existing inventory, vehicles, or other items that have value. Since no real collateral is involved there is no need to do things like appraisals, and that eliminates added expenses while it also cuts down on the time needed to process the loan and get the cash into the business owner’s hands.
Instead of following those traditional protocols and conducting the loan process the way a regular bank or conventional commercial lender would, the lender who does a business cash advance based on credit card receipts simply verifies that the business accepts credit cards. If you own a business then you can be expected to provide some basic information, such as documents to show that you are legitimately in business and have a credit card processing merchant account. You will also probably be asked to provide copies of your last 3-4 months worth of credit card receipts or merchant card processing statements, which the lender will use to determine your normal volume of credit card business or revenue that your customers and clients charge to plastic.
Then after the loan is made, a portion of those credit card sales that go through the business are earmarked as the loan repayment and they become the source of funds to pay off the loan. A business owner might borrow several thousand dollars, for example, to buy new inventory or finance an expansion or the opening of a new office and then dedicate a percentage of credit card sales over the next 12-24 months to service the repayment to the lender.
Because these loans are not subject to the same financial industry rules and regulations as normal bank loans do, they are somewhat controversial. The banking community would like to see them regulated because they represent competition for their commercial loan business and also because the banks and other regulated lenders think it is not fair for them to have to follow so many rules when those who do cash advance business loans can operate much more freely.
Most business owners don’t care one way or the other, as long as they deal with legitimate cash advance lenders who don’t try to cheat, defraud them, or charge exorbitant rates of interest. They expect to pay more interest for the convenience of these cash advances, and they usually only turn to them as a loan of last resort for emergency needs to keep a business going during difficult times. Those who borrow cash advance loans are usually already fed up with trying to get their money from conventional lenders, so they are happy to take their business to a cash advance lender instead of struggling to get a loan from their banker.
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