How to choose between a small business loan and a merchant cash advance?

By | April 30, 2021

How to choose between a small business loan and a merchant cash advance?

Small business loan: Running a small business is something that requires constant attention. A business owner needs to juggle different roles, one of which is the financial controller because without finance a budding business will fail. That being said, finances are needed for things like replenishing inventory, buying updated equipment, repairing, upgrading, and paying staff. But there are times when you will find yourself with little capital and in situations like these, how do you find the money to keep your business alive? As a business owner, you have several financing options at your disposal, so much so that it is probably difficult to decide which of these offers is best for the business. Here we look at two of the main types of financing and how they work.

Small business loan

Small Business Financing

You can usually get small business financing from a bank and this is the first step most businesses take when they need money. Small business owners must submit an application to the bank after which the bank will examine a number of factors including their business history, credit history, and the collateral they can present. The process of obtaining business financing can take weeks, if not months.

This type of business financing is usually best for businesses that have predictable monthly sales. The business owner must also have the ability to present collateral and have a solid credit history. You also shouldn’t be in a rush to get the loan because if you are, this is probably not the best option.

Supplier financing

Vendor financing allows business owners to raise up to around $ 150,000 if they are a reputable equipment dealer, vendor, manufacturer, or reseller. Unlike a regular business loan, this relies heavily on your own personal history and business history, but you don’t need to have perfect credit to take advantage of this type of financing. This loan does not require extensive documentation or a list of your clients. All you need to do is prove that you are a reputable provider and your credit history. That said, many companies reserve the right to request more documentation to make sure they know everything about your business before approving the loan.

Vendor financing is great for small businesses whose business changes every month and for business owners who don’t have perfect credit and zero collateral to present. The money can be used to increase inventory and venture into new markets. However, these types of loans have a higher interest rate than usual associated mainly because they are unsecured loans.

Small Business Loans: Pros and Cons

Pros

Loan amounts are higher: Small business loans guaranteed by the US Small Business Administration have a maximum size of $ 5 million, while online lenders provide up to $ 2 million. This makes small business loans better for a major expansion, such as buying or renovating real estate, buying equipment, financing inventory, or refinancing debt.

Costs are lower: Traditional banks tend to offer the lowest interest rates for companies with strong finances. For example, SBA loans, backed by the Small Business Administration but issued by lenders like banks, are likely to have lower interest rates than business credit cards. An SBA loan of more than $ 50,000 and repaid in less than seven years, for example, has an interest rate of 6.5%, while a loan of $ 25,000 or less that is repaid in more than seven years has a rate of 9%.

Online lenders can also charge lower rates than business credit cards, with an APR starting at 6% for term loans and 8% for lines of credit, usually if you have strong personal credit and business finances.

Long repayment terms are available: Small business loan repayment terms vary by lender but can be as long as 25 years for some SBA loans. This translates into much more affordable monthly payments for companies that want to make a significant investment in their businesses.

Let’s say a business is approved for a loan of $ 30,000. If the loan has a repayment term of five years with a 10% APR, the business owner must make 60 monthly payments of $ 637.

Check out our business loan calculator for business loan costs and payments.

Cons

You may need collateral: Some small business loans require collateral – assets such as equipment, inventory, or real estate that the lender can seize if you miss payments. Collateral and personal guarantees are required as collateral on all SBA loans.

While a default could result in the loss of the asset, placing collateral is likely to get you a lower interest rate on the loan than you would receive with a business credit card or unsecured online loan.

Scoring is more difficult: Getting approved for a small business loan is probably more difficult than for a business credit card. In September 2017, large banks, those with $ 10 billion or more in assets, approved 24.8 % of small business loan applications, while 57% were approved by alternative lenders, according to Biz2Credit.

To qualify for a traditional bank loan, you will need good personal or business credit and collateral. Traditional banks generally require a large amount of documentation, including personal and business financial statements, profit and loss statements, income tax returns, and a detailed business plan to show that you can repay the loan.

Many alternative business lenders also require a strong business financial history and average good personal credit score.

The time for financing is longer: Depending on the lender, it can take a few weeks or more to get funds, while you can get a business credit card within a week after approval.

Bank loans may require you to apply in person and complete documentation. You can complete online applications from online lenders and get funds as fast as 24 hours to a few days. However, the rates can be higher than at banks.

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