The only way to make money in business is by spending money. You must be able to provide a good or a service, and both typically require funds. Most people are able to start their own business with their own savings, with a personal bank loan, or with funding provided by investors. However, many small business owners find that they need more funding somewhere along the way. The most common way to expand your business is to take out a small business loan to help you grow. What happens, though, when the bank denies your request for a loan?
Small Business Loan Denials
A small business loan is available to small business owners who have been in business long enough to establish a business history. Your business must have its own credit score, and it has to be a good score. In addition to a professional business credit score, your own personal credit score needs to be good if a bank is lending you money. You also need a detailed and precise business plan. If a bank doesn’t feel that your credit scores are high enough or that you have not been in business long enough to allow them to lend you money, you may find that you are unable to secure a small business loan. Additionally, you might find that it’s impossible to get a small business loan if you don’t have a business plan that the bank feels is good enough. What options are left for you?
Use A Merchant Cash Advance
A merchant cash advance is an alternative to a small business loan. However, it’s not the same as a loan. A small business loan is a loan you spend years paying off. You have one monthly payment made to the lender every month. The amount of your payment only changes if you opt to pay more than the amount due. If you pay it off early, you save a lot of money on interest. It takes weeks of paperwork, applications, and stress to secure a loan like this.
A merchant cash advance is not a loan. It’s a cash advance. You do not get many years to repay this money. You have approximately one year to finish making payments. It does take longer in some instances, but many people are able to repay their merchant cash advance in as little as three months. The reason it’s difficult to pinpoint a repayment date is that you pay daily.
The amount of your payment is not one you know in advance. You don’t pay monthly. Your payment is made to the lender via a bank ACH withdrawal every day. The amount you pay is based on the interest rate you agree to when you sign up for this type of loan, and it’s based on the number of sales you make that day in which your customers use their credit card or their debit card. If you have a slow day, your payment is less that day than it is on days when you make more sales.
This is a helpful tool for many borrowers, but it’s also dangerous. You never know how much you will pay. While you might be given a merchant cash advance when a bank loan was denied, you also pay a much higher interest rate. Depending on your personal and business credit score, you might pay an interest rate that extends well into the triple digits.
Is This Form of Borrowing Right for Me?
If you’ve been denied a small business loan, this type of borrowing might be right for you. However, it might not be right for you. If you cannot guarantee that the money you are borrowing will help you grow your business and make more money, it might cause you to fall short making your repayments. This can lead to a cycle of borrowing even more, and it can cause you to fall further into debt. This type of loan is not one you can pay off early, either. You can pay it off early if you want, but you don’t get to avoid paying the interest rate with an early repayment.
If you’ve been denied a small business loan or you simply cannot wait long enough for a bank to fund your loan, this might be the right option for you. The way to ensure your merchant cash advance is successful is to ensure you can repay the loan, and it’s to take only what you need. If you qualify for more, you don’t have to take that money. Take only what you need so you can always afford to make your repayments. This form of borrowing is expensive, and you need to be prepared for the cost.