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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