If you need financing for your business, a merchant cash advance can be an attractive option if you have strong revenue and need funding quickly. However, there are plenty of other options worth exploring. Here are some great merchant cash advance alternatives you should consider.
A term loan is the most conventional form of business financing and it can be a strong choice than a merchant cash advance in a few notable respects. For one, term loans can be much cheaper than MCAs, especially if you have good credit and solid business financials. Also, consistently making repayments on time will improve your credit score, which can open the door for more financing later in your business journey.
The length of a term loan can range from several months to more than 30 years, but most loans have a term of 10 years or more. As far as the amount of your loan, this will ultimately depend on your businesses revenue and credit rating. It’s possible to secure a term loan of over $1 million in some cases.
Regarding interest rates, most conventional business term loans have an interest rate between 6.25% and 8.7%. In many cases, if you secure an interest rate closer to 6%, borrowing any sum of money will be cheaper than taking out an MCA of equal value.
However, you’ll have to put up 80%-100% or more of the loan’s amount in appraised collateral. Also, you’ll have to sign a personal guarantee, where you agree the funder has the right to seize and sell your personal assets to offset the loss they’ll take if you default on the loan. Homes, automobiles, boats, collectables, and other valuable assets can be used as collateral.
Furthermore, you’ll have to make a down payment of 10%-30% to secure a business term loan. Funders require down payments to reduce their risk, but a sizable down payment also shows that the borrower is serious about the obligations they are undertaking.
Depending on the funder you choose, it can take anywhere from a few days to several weeks to secure a term loan. If you’re getting one from a traditional funder, such as a bank or credit union, expect a one- to two-week process. If you choose an online funder, you may be able to get the funds you’re approved for in 24-48 hours.
Lastly, if you default on a business term loan, your funder will take possession of the collateral you put up to secure the loan. If there’s still a balance after liquidating your collateral, they’ll enforce the personal guarantee to make up the difference.
A Small Business Administration (SBA) loan is like a conventional business loan in a number of ways, but it’s the differences between the two that lead borrowers to opt for one over the other.
For one, SBA loans are often easier to secure, meaning you can secure one even if you have bad credit or limited business history. However, the trade-off here is that they’re more expensive because the interest rates are higher. That said, the interest rates are capped, meaning they can only go so high.
The two most common kinds of SBA loans are 7(a) and 504 loans. If you need to use the funds from a loan as working capital, go with a 7(a) loan. If you need funds to purchase or develop real estate, a 504 loan will be the better option. Regarding terms, 7(a) loans can have a term of several months or years, whereas most 504 loans have a term of 10-30 years.
It can take 30-90 days to secure funding from an SBA loan, and this is one area where MCAs have SBA loans beat, as you can often get funding in 24-48 hours with an MCA.
If your SBA loan is for $50,000 or more, you’ll need to put up appraised collateral and sign a personal guarantee to secure it. Also, a down payment of 10%-30% will be required, which is something to consider.
Lastly, should you default on an SBA loan, there’s a chance you could get most of the loan forgiven if you’re accepted into their SBA Offer in Compromise (OIC) program.
If your company receives a sizable amount of income from invoicing, you can choose invoice factoring instead of taking out an MCA. Invoice factoring is an alternative financing solution that can help you secure a large lump sum of capital quickly. Here’s how it works.
First, you sell your outstanding invoices to a factoring company at a discount of 80%-90%. After the factoring company purchases the invoices, it’ll be up to them to secure what’s owed by your customers.
If the factoring company can’t collect the money, and you’ve agreed to recourse factoring, you’ll have to return what you were paid and pay fees. When your customers pay their invoices, the factoring company will send over the remaining 10%-20% minus fees.
With invoice factoring, there are no interest or factor rates, so it’s one of the cheaper financing options. If your customers pay the factoring company quickly, you may pay just 1%-3% of the invoice amount in fees. If they take a while or make it difficult for the factoring company to collect what’s owed, you might pay closer to 10% in fees.
Before selecting this kind of financing, consider what could happen to your relationships with customers as a result. If the factoring company aggressively pursues what they’re owed, it may discourage your customers from giving you their business in the future.
If you’re going to use the funds you borrow to purchase new equipment, equipment financing may be the best financing option for your business. Equipment financing is very similar to an auto loan, in that the loan is backed by the equipment purchased, meaning you don’t own it until it’s paid off. Therefore, if you default, the funder will repossess the equipment – so you need to have a strong plan to make payments on time.
The term on an equipment financing loan is usually 10-30 years, and the interest rate you get will be between 7% and 20%. Like with regular term loans, your interest rate will be determined by your personal and business credit scores, the loan’s size, your business’ finances, the loan’s purpose, and the current price of credit.
Applying for an equipment loan with good credit is a smart move because you’ll have a good shot at securing decent terms. However, since the loan is secured, you may even be able to get financing with bad credit.
To secure equipment financing, you’ll need to explain why the equipment is a smart investment for your business and the funder. Also, for many funder, the equipment must have a useful life greater than 10 years.
It’s important to note that if the equipment becomes inoperable before you make all the required repayments, you’ll still have to pay back what you owe to the financing company.
With a business line of credit (LOC), you can borrow up to a certain amount over a specified period, and you’ll only have to pay interest on what you borrowed. How much you’re allowed to borrow is determined by your business’ creditworthiness and finances, but many businesses can secure over $100,000.
Before you apply for an LOC, you need to be aware of the fees you’ll be subject to. There is often an origination fee, an annual fee, and a draw fee.
Also, you won’t get an interest-free grace period, nor will you get cash-back or other perks for borrowing, which is something to consider. Check out our guide comparing a merchant cash advance vs line of credit for more details.
Business credit cards are popular among small businesses, mainly because there are incentives for using them and you don’t have to put up collateral to secure one. Plus, they’re a lot like personal credit cards, in that you can borrow up to a certain amount, get cash with them, and complete balance transfers.
And unlike an LOC, you’ll have access to your line of credit for as long as you’d like. Plus, you may not have to pay an annual fee for having a business card.
However, the credit line you get will be smaller than what you’d get with an LOC, which is why business credit cards are mainly used as a means of meeting short-term, smaller obligations.
You can check out our guide on MCAs vs business credit cards for an in-depth comparison between the two.
Many small businesses and startups try to secure venture capital (VC) when they don’t have the cash flow to secure other types of financing. Essentially, an investor, investment bank, or traditional bank provides the funds a business needs to operate and grow in exchange for equity share in the company.
Granted, you won’t have to make repayments on venture capital, but you may lose creative control if venture capitalists own a significant portion of your company. Also, you may be forced to exit earlier than you’d like so the VC investors can cash in.
In short, venture capital should only be considered if your business can’t secure financing another way and you don’t mind sharing ownership with investors who are chiefly concerned with making a profit.
Securing a grant can be a great alternative to an MCA, or any kind of business loan for that matter, because the money doesn’t have to be paid back. However, getting approval for a grant can be difficult, especially if your business isn’t providing services that directly benefit the public.
Grants are given by governments, charitable foundations, individuals, grant-making institutions, and businesses that are committed to corporate social responsibility for the purpose of improving local communities. For example, if your business wants to start a community outreach program, getting funds from a grant can make this happen.
The downsides here are that it can take weeks or months to secure financing. Also, your business will have to be very careful with how it uses the funds from a grant, as misusing grant funds could subject it to criminal prosecution.
Crowdfunding is more like a grant than a business loan. That said, if your business doesn’t reach its funding goal, you may need to return the contributions it received.
This financing solution is especially popular among small businesses and startups because it’s a cheap way to generate a sizable amount of capital. It’s perfect for businesses that have a unique story which resonates with people.
Of course, crowdfunding has its downsides, and these should be considered before you attempt to raise money this way.
For one, you’ll have to pay a percentage (5%-12%) of what you received to the platform that hosted your crowdfunding campaign. Also, since state and federal laws regulate how much an individual can contribute to a crowdfunding campaign, you’ll need to attract a lot of interest to generate tens or hundreds of thousands from crowdfunding.
Merchant cash advances are great when you need funds fast, but they’re quite expensive. This is because factor rates are used instead of interest rates. Also, MCAs are not subject to usury laws, meaning you could pay an exorbitant amount to borrow.
Most businesses that secure an MCA get a factor rate between 1.1 and 1.5. So if you borrow $100,000, and your factor rate is 1.2, you’ll have to pay back $120,000. The rate you get is determined by a range of variables, but your business’ size and volume of card sales are the most important factors.
However, if you get a term loan or an SBA loan with a particularly high interest rate, you could end up paying as much as you’d pay for a merchant cash advance, especially if you get hit with late fees frequently.
Lastly, since repayments are often a percentage of total card sales over a week, month, etc., an MCA can put a strain on your business’ finances, as you’ll have to make repayments regardless of whether you generated considerable revenue or not.
If your business doesn’t generate a large volume of card sales, or if your card sales history is spotty, choosing another type of financing over an MCA is probably a wise decision. In fact, you may not even be able to get an MCA if you can’t show a sufficient history of card sales.
This is the most important factor to MCA funders because it’s directly tied to your ability to make repayments. Basically, every time a customer pays with a card, your MCA funder will get a holdback, or a portion of the payment. Therefore, if your business doesn’t generate a suitable volume of card sales, it will take a long time to pay back your funder.
Card sales history isn’t nearly as important with other funders because your ability to consistently make repayments on time isn’t directly tied to it. Instead, other funders will just want to see how much revenue your business generates on a monthly or yearly basis. Whether or not that revenue comes from card sales doesn’t really matter to them.
If you have high personal and business credit scores, you should consider cheaper financing alternatives before taking on an MCA. If your personal credit score is above 680, and your business credit score is above 80, you should be able to secure a conventional loan with decent terms from a traditional or online funder.
MCAs are a favorite financing solution among businesses with bad credit specifically because a borrower’s creditworthiness is not a make-or-break factor in the approval process. However, MCA funders are still aware that there’s elevated risk on their end, and that’s why it costs so much to borrow from them.
With high credit scores, you can secure a conventional business loan with an interest rate between 6.25% and 8.7%, and you won’t have to make repayments on a weekly or bi-weekly basis.
Additionally, consistently making on-time repayments with a conventional loan will boost your personal and business credit scores—something that won’t happen with an MCA even if you never miss a payment.
When you need business financing, but you don’t want a merchant cash advance, you have a variety of financing options to choose from, such as term loans, SBA loans, invoice factoring, equipment financing, business lines of credit, business credit cards, venture capital, grants, and crowdfunding.
Generally, it’s better to go with an MCA alternative when you’re looking to save money and you want to make repayments on a monthly basis over a set term.
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