When your small business needs capital right away, there are many options that can get you the funding necessary to keep your company running without interruption. One popular option is getting a merchant cash advance, which involves paying the loan back through your debit and credit card sales. While this might seem like a great idea, it’s usually not, mostly because of their high annual percentage rates that can reach over 200%. Instead, try one of these top alternatives to an MCA loan.
Short-Term Small Business Loan
One of the main drawbacks of an MCA loan is that it charges you a fixed factor rate for the entire term of the loan, no matter how quickly to repay it. This means you will pay the entire amount of interest even if you pay the MCA off early. Thus, there is no incentive to pay it off before the end of the term, which can lead to a cycle where you get in debt and stay there.
A short-term business loan, on the other hand, can usually be paid off early, saving you hundreds, and possibly thousands of dollars in interest fees. In fact, some lenders offer you a discount if you pay the loan back within three or four months, giving you a fantastic incentive to get out of debt as quickly as possible.
Of course, not everyone will be eligible for a small business loan, since you do have to have a fairly good credit rating, but if you shop around, you might be able to find a lender that will take a chance on a subprime borrower (someone who presents a bit of a credit risk). You might pay slightly higher interest rates in return for the increased lender risk, but those rates will still usually be much less than what you’ll get on an MCA loan.
A small business loan may also take a little longer to get approved, but in the digital age, it’s usually not too long. However, if you need immediate, same-day funding, check out other options.
Small Business Line of Credit
Same-day funding is a major reason why MCA loans are popular among small business owners who suddenly find themselves with a disrupted cash flow. But they aren’t the only option for same-day funding and they definitely aren’t the cheapest choice. A better alternative is a small business line of credit because of the much lower interest rates.
Typically, it doesn’t take long to set up a line of credit if your company meets the qualifications. Often, companies have to generate a minimum monthly revenue (around $40,000 to $50,000) and have been in business for at least two years. As such, a line of credit isn’t a good choice for brand new companies or those that are struggling to generate revenue. But, if you qualify, it’s reassuring to know that you have the line of credit available whenever you need to access it for immediate funding.
These days, you can usually get fairly low interest rates on a line of credit and you might even get a discount if you connect your line of credit to your business banking account so that payments are taken out automatically. This type of arrangement lowers the risk to the lender of not receiving payments so they reward you with a slight discount in interest.
Invoice factoring operates in a similar way as MCA loans, but because invoice factoring bases its funding on existing invoices instead of future debit and credit sales, the interest rates are significantly lower. This funding option works as an advance so the lender gives you an amount of money equal to or less than your outstanding invoices. As you receive payment for those invoices, you send the money to the lender, plus interest and fees.
What makes invoice factoring a better option than an MCA loan, in addition to better interest rates, is that you don’t have to guess at what your future debit and credit card sales will be to attempt to calculate when you’ll be finished paying off your loan. You won’t receive an advance from the invoice factoring lender that’s more than your outstanding invoices, so you can’t borrow more than your customers owe you.
Often, companies find themselves in need of immediate funding because their equipment breaks down and they need to buy new equipment quickly in order to become operational. Instead of getting a high-interest MCA loan, consider finding a lender that provides equipment financing that uses the equipment you’re buying as collateral for the loan.
Since the lender can repossess the equipment if you default on the loan, they aren’t taking as much of a risk on lending you the money. As such, the interest rates for an equipment loan are much lower than those on an MCA. Moreover, as with a small business loan, you can pay the equipment loan off early without penalty. Again, this option can get you out of debt faster than an MCA loan that can put you in a cycle of debt that’s difficult to recover from.
Long-Term Small Business Loan
If you’re in need of a large amount of money that you intend to pay back long term, an MCA is absolutely the wrong choice. A traditional small business loan is the way to go, and even though you won’t get approved as quickly as you will with an MCA, a small business loan is the smarter financial move. Not only does a small business loan have lower interest rates, but you can borrow more money and pay it off earlier than you can with an MCA.
Keep in mind that the qualifications for a small business loan are stricter than they are for an MCA, but that’s why you get lower interest rates. If you need a bridge between immediate funding and a long-term loan, consider one of the other short-term options on this list instead of an MCA so that you don’t find yourself in a more precarious financial situation than you already are in.
An MCA might seem attractive at first, especially if you’re in dire financial straits. But, take a few minutes to consider these alternatives. You might just save your business’ future.