Businesses payday loans is a nickname of sorts to describe risky short-term business financing, but it is usually a reference to cash advances from merchants with quick repayment terms and high rates.
In the realm of personal lending, payday loans offer quick access to cash, however, you may be charged an interest rate that is as high as 700%-5000 percent on a loan that typically reaches a maximum of $1,000. Additionally, payday loans often require borrowers to have access to their bank accounts, with the payment due in one lump amount.
A payday loan could technically be used to pay for expenses for business, however, a merchant cash loan might be better suited to this case. A payday loan can be overwhelming for the borrowers, however, you should be aware.
Businesses payday loans: Understand your risks
The business payday loans — in this instance cash advances for merchants are quick and easy options for business financing at a fixed price that can be used for:
- Purchase inventory
- For seasonal costs, cover the cost of
- Daily supplement Cash flow
They can also become expensive to pay back and disrupt cash flow. They aren’t loans. Instead of lending money the merchant cash advance provider purchases part of a company’s future receivables, typically credit card transactions in exchange for an amount of capital.
A Merchant capital provider will take a predetermined percentage of sales per day till the loan is repaid and includes an amount. The amount of the advance is taken out of each transaction prior to the company seeing the funds. Whether your sales for the day are low or high the cash advance company will receive the same percentage of every sale.
There are some other distinctions between cash advances for merchants -which can cost anywhere from 20 to 40 percent more than the value of the advance as well as the traditional corporate loans:
- There is no obligation to pay: Loans generally come with a promissory note within the agreement for the loan which binds the borrower to repay the loan, no matter what. Merchant cash advances do not hold those who borrow them to the same expectations. So long as you keep running your company to your best abilities and you’re not responsible to repay the loan in the event that your business shuts down for reasons that are beyond your control. It may seem like a great deal however, this flexibility isn’t without a price that is really high.
- Costs can be high. Since the cash advance provider is responsible for the entire risk, the cost of the loan can be quite excessive. Traditional lenders usually are able to confiscate assets in order to recover losses in the event of a business’s default which makes the alternative less costly.
- No loans. Traditional loans typically come with personal guarantees or liens that make borrowers accountable for the debt. The cash advances of merchants aren’t backed in the same manner and the issuer is able to take all risks.
- Factor rates. The interest charged on cash advances to merchants is typically expressed in terms of factor rates. These are expressed as decimal numbers instead of percentages. To determine the amount of your loan you’ll need to multiply your amount of advance using the percentage rate. The sum will be the amount you’ll have to repay.
If you are considering applying for a cash advance
While it’s risky, a cash advance can be an appealing option if your business isn’t eligible for other forms of financing for business and you require cash quickly to cover an unexpected cost.
As with payday loans, merchant cash advances are usually available in a matter of minutes. Cash advance lenders typically have less restrictive criteria for eligibility and you can get cash without any sub writing.
Companies that have a high volume in daily credit card transactions could be ideal candidates to take advantage of a cash advance for merchants. If you’re able to deduct a percentage of your daily sales to continue to cover the operating costs and cash flow, you could not be in danger.