Business financing takes many forms and each one has its plusses and minuses. The simplest forms of financing are Merchant Cash Advance (MCA), Term Loans and Invoice Financing. Although this article does not touch on Invoice Financing we will include it for this discussion because it is quite often the best option.
It is perhaps simplistic for some but very important to understand what the 3 options are exactly. MCA is where a lender will “consider your business’s future credit card revenue as assets. As such, they’re willing to advance your business cash with the promise of a return in the form of a portion of your business’s daily credit card revenues.” Repayment is made by the lender taken an agreed upon portion of these future purchases before the credit card processor forwards you the money. This is important to realize and fully understand. In this case the lender will take a cut of your future profits, which will affect your future working capital.
Term loans on the other hand “offer straightforward, traditional funding to small business owners through a lump sum that’s paid off, plus interest, with a predetermined, scheduled monthly payment.” Most owners understand a term loan’s structure and how they work. What they may not understand or properly plan for is the amount of money they will need every time a payment is due and a slow week or month on the revenue side does not affect this amount; P&I is a set number and payments are not flexible without some concession on the lender’s part should you not be able to make a payment. This will typically require a penalty rate or amount until you can get the loan back to current.
We are also adding Invoice Financing to this discussion since it can very often be your best option. Invoice Financing involves an advance from a lender (typically 80%) of the value of an outstanding invoice. This option works best for many businesses because it can give you a set amount of cash with an offsetting asset to pay down the loan. There are no calculations required and no amount to set aside for repayment; the lender will receive payment from your customer, take back they advance they gave you plus any fees associated with the agreement and forward you what is left over.
No one article is going to answer this question for you but doing a little homework and comparing your options across multiple platforms is always the best way to figure out the financing arrangement that is best for you.
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