Small business financing has greatly diversified over the years. With all the various options available the three that consistently rise to the top of the list are loans, merchant cash advances, and accounts receivable factoring. Each one provides financing differently, so it is wise to make a comparison before you decide on one over the others.
Merchant Cash Advance Loans
Merchant Cash Advance Loans have been the primary financing method for small businesses everywhere. Based on credit ratings, collateral, financial history, and other criteria, businesses can get financing in exchange for debt and interest. Unfortunately, lenders have not made financing accessible. The Great Recession of 2008 and the economic slump of 2020 caused banks to raise requirements in order to mitigate the potential risks of businesses defaulting on loans.
For businesses that do qualify for loans, the funds provided are single-use, meaning once the capital provided is spent, they have to go through the application process all over again. Additionally, the debt from the loan is repaid according to a schedule, with no flexibility. If a business does not have the money on hand from sales to repay the loan, they are in danger of defaulting, which carries a number of penalties. Discover how you can navigate your business without debt based loans.
Merchant Cash Advances
Merchant cash advances in comparison are marketed as a friendlier and more flexible alternative to loans. Instead of using collateral and credit scores, a merchant cash advance is structured around overall sales. While there is no debt placed on the books, the interest rates on a merchant cash advance are much higher than loans. Repayment is more flexible than a loan.
Instead of rigid monthly payments, a small percentage of credit card sales goes toward repaying the balance. What is omitted is that between the high interest rates and small payments, it is almost impossible to repay the balance of a merchant cash advance without having a large balloon payment – plus interest – at the end of the terms. Another disadvantage is when defaulting on merchant cash advances is unpaid, it can result in a breach of contract and the lender could end up suing your business. Find out more about receivable factoring vs merchant cash advances.
Accounts Receivable Factoring
Accounts receivable factoring is a debt-free financing solution for small businesses structured around unpaid invoices. Instead of waiting 30, 60, or 90 days for customers to pay their invoices, businesses can factor their unpaid receivables in exchange for immediate cash. Unlike loans, there is no debt involved, and factoring does not impact credit ratings. In contrast to merchant cash advances, factoring does not have ongoing interest rates or balloon payments. Accounts receivable factoring is transparent, fast, and it allows small businesses to boost cash flow and pivot away from loans. Learn more about the 4 major advantages of accounts receivable factoring.
At New Century Financial, we offer the most comprehensive accounts receivable factoring services for small businesses. Contact our offices today to get the small business financing you need or learn how we can help your business reach its growth potential with our “Entrepreneur’s Guide to Factoring“. Call us today at 866-579-1483 or Apply Now to get started.