Many small business owners have wondered if they can get a quick cash advance for their business, sort of a payday loan, but for businesses. These kinds of loans are popular but come with considerable pitfalls. Below we explain what they are, the risks, and alternatives such as invoice financing.
A payday loan is a short-term consumer loan which is notoriously expensive. In most states, a loan is capped at $500. In some states, the loan is capped at $1,000.
Can you get a payday loan for your business? The simple answer is no. You can’t get a payday loan for your business. A payday loan is NOT designed for a business purpose. But, you can get something just like it. It’s called a merchant cash advance, or an ACH loan. They are only for businesses. You can’t get one unless you own a business. They are similar to payday loans in some ways: short-term and expensive.
Dangerous for the Same Reasons
Getting a business cash advance, or a payday loan for your business is dangerous for the same reasons that payday loans are.
The cost is unreal. The average annual percentage rate on a payday loan is 391%. The annual percentage rate for a merchant cash advance, like a payday loan, can reach 350%. Some ACH loans can exceed 200%, according to Nav.com.
Merchant cash advances and ACH loans are loaded with fees and pull money automatically. This makes it very easy to go deeper into debt with these loans. If you can’t pay it back the first time, you probably can’t pay it back the next time. It is difficult to get out of debt by going deeper into debt.
Borrow Against Their Future Cash Flows
Merchant cash advances and ACH loans are both types of loans for small businesses. They work by allowing business owners to borrow against their future cash flows. Let’s explain how they actually work.
A merchant cash advance is a short-term loan for a small business. Like a payday loan, a merchant cash advance is easy to apply for, but it is a very expensive loan.
When you apply for a merchant cash advance you are essentially asking a lender to buy your future credit card sales. The lender gives you cash now and then collects on those sales later. Some lenders can approve you in 24 hours. You do not have to pledge collateral. Then the lender takes its money back by collecting a percentage of your daily credit card sales. The holdback rate is a percentage of your credit card sales that the lender keeps to pay themselves back for the loan. They will collect daily or weekly until they collect the total amount of the loan and fees. On the surface, a merchant cash advance may seem like a great option for small businesses. But, they come with risks.
These are loans for small businesses, BUT, they operate just like payday loans. If you were struggling to pay the loan back today, how can you possibly pay it back tomorrow? You could end up deeper in debt.
An ACH loan works like a merchant cash advance in many ways. But there are three main differences between an ACH loan and a merchant cash advance.
First, an ACH loan is taken out against future revenue, while an MCA is against future credit card sales.
Second, an ACH loan takes money back by debiting your checking account. A merchant cash advance takes money back by collecting money on credit card sales.
Third, a merchant cash advance collects money via credit card sales at the holdback rate. An ACH loan is repaid at a fixed rate.
ACH loans are loans for small businesses and are just as dangerous as a payday loan. ACH loans, like an MCA, and like a payday loan are very expensive loans. Paying an ACH loan early doesn’t save you any money.
Alternative Products
There are alternatives to a business payday loan. Some of these alternative products are safer than a business payday loan. We list some of these options below.
Invoice factoring is a product that allows business owners to sell their accounts receivable to a factoring company. You can get 80% to 90% of the total value of the invoice up front. The factoring company pays you cash for the invoice and then they get their money back by collecting the invoice themselves. When the customer pays the factoring company, the factoring company will pay the business owner the rest of the invoice, minus a factoring fee.
Invoice factoring can still work for you if you have bad credit. The credit score of your business or the credit score of the business owner matters less than your customers’ credit when you are factoring an invoice.
- It’s a good fit if you have customers that take a long time to pay you for goods or services.
- It’s also a good fit if you have poor credit.
- It’s also a good fit if you would like help collecting from customers.
Invoice financing is similar to factoring but you own the invoice during the duration of the loan. Invoice financing, also called invoice discounting, is a product that allows business owners to use an invoice as collateral for a loan. When the customer who owes you money pays you back, you pay the financing company back for the loan. Your customers don’t have to know you are financing an invoice.
- It’s a good fit for business owners who wish to retain the ownership of the invoices and handle collections themselves.
- Invoice financing is a good fit if you want to keep the arrangement private from your customers.
- Invoice financing is a good fit if you want funding that can cost slightly less than factoring.
In many ways, a business credit card is a better option than a business payday loan. A business credit card can give you access to revolving credit. Business credit cards can be a great option for business owners who have fair credit or good credit. Secured cards are a type of business credit card that come with a security deposit. The deposit acts as collateral for the credit line. Secured credit cards can help you rebuild your credit.
- It’s a good fit if you want rewards such as cash back.
- A secured card is a good fit for businesses who can’t get a regular business credit card due to poor credit.
A microloan can be a good alternative to a business payday loan. A microloan is a very small loan for a business. Microloans are usually capped at $50,000. With an SBA microloan, you can’t use it to pay off other debt or to purchase real estate.
- It’s a good fit for businesses who would like to build up their credit.
- It’s a good fit if you need a small amount of money.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
