5 alternatives to getting a merchant cash advance
5 merchant cash advance alternatives
- Alternative business loans
- Peer to peer loans
- Invoice factoring
- Invoice financing
- Business line of credit
If you’ve struggled to find financing for your business, you may have stumbled upon merchant cash advances as one financing option that looks past issues with little or even poor credit.
It’s true that merchant cash advances are a way to finance your business quickly, with lower credit standards than other financial products. It can be an expensive way to borrow money, however, with APRs reaching into the triple digits.
Merchant cash advances make sense in some circumstances, but it’s always a good idea to look at alternatives before making a final decision. Here are a few:
1. Alternative business loans
Many businesses consider merchant cash advances because they don’t qualify for a traditional business loan, or because applying for a traditional business loan would take too long. With the advent of online lending, however, many alternative business loan products have become available. These loan products are often quicker to fund and easier to qualify for than a traditional bank loan, although interest rates on the loans may be higher.
2. Peer to peer (P2P) loans
Peer-to-peer loans are a new kind of online financing product that allows individual investors to collectively fund personal loans for a variety of purposes. While a merchant cash advance is typically paid off quickly — generally from three to 12 months — a peer-to-peer loan is typically structured like a traditional term loan, often taking three to five years to pay off, with fixed monthly payments.
3. Invoice factoring
In some ways invoice factoring is similar to taking out a merchant cash advance. Both financing options are alternatives to traditional business loans, and open up financing to businesses that wouldn’t otherwise meet strict credit qualifications.
Though they’re similar, invoice factoring – based on existing invoices – can prove less risky than a merchant cash advance – based only on projected sales. If future sales aren’t as good as projected, your business is on the hook for the difference.
4. Invoice financing
Although invoice financing is similar to invoice factoring, there are important distinctions. With invoice factoring, the company providing your business with financing — known as the “factor” — takes control of your unpaid invoices. Often, your customers must pay the invoices directly to the factor.
Invoice financing, however, is essentially a loan backed by the value of your outstanding invoices. With invoice financing, your customers pay you, not the factor. You’re responsible for paying back the factor, along with any fees or interest, after your customers pay you.
5. Business line of credit
A business line of credit can be a versatile source of financing for a business. Similar to a credit card, a credit line is a form of revolving credit, meaning borrowers can use as much or as little of their available credit as they wish. As borrowers pay down their outstanding balances, the available credit replenishes.
Business lines of credit typically have lower interest rates than other financing options, such as merchant cash advances or peer to peer loans. They can be more difficult for businesses to qualify for, however, and typically require extensive documentation — though newer, nontraditional credit lines are available which are driven less by documentation and more by the borrower’s FICO score.