Are Cash Advances Smart Loan Alternatives For Businesses?

Many businesses are struggling in the current economy; due to the relentless recession and irresponsible lending habits of major lenders over the past few years, banks have tightened up on loan lending. Looking to avoid another market crash, such as that which has persisted for the past five years due to the banker's faulty home loans, government agencies have installed more regulations on lending practitioners. This is good news for the country, as it helps to protect home buyers and other borrowers from fraudulent or faulty loans, but it can be bad for business owners, who often need loans to keep their companies afloat.

Business owners often rely on bank financing to cover costs, which may lead them to seek out loan alternatives when unable to secure a traditional loan, including high interest cash advances or other loans which can perpetuate a cycle of loan dependence. Often, business owners barely break even after all the bills are paid, potentially leading to the loss of one's business and possible bankruptcy. For business owners who can't obtain traditional loans, cash advances may provide the needed funds temporarily. However, they are not the only option.

When a traditional bank loan is unattainable, the following list of alternative finance options for businesses might come in handy, including Merchant Cash Advances, Non-Bank Loans, Asset Based Lending, and Lease Backs:

*Merchant cash advances providers loan a lump sum amount to a business and collect the repayment by means of abstracting a percentage from daily credit card sales until the loan plus a predetermined fee is paid in full. On the plus side, merchants do not have to pay back the fee in a lump sum, making payments more manageable. On the con side, these advances have high interest rates and often take a long time to pay off, accruing fees over the length of the loan.

*Non-bank loans come in two primary forms: revenue based finance lending and non-profit community development financial institutions (CDFIs). A revenue based finance lender works almost like an investor: the lender provides a loan for partial ownership of a high yielding company, usually acquiring 1 to 5 % of said company. This type of loan could be a good option for established business with high gross margins, but will not work as well, if at all, for upstart companies. For smaller companies, CDFIs act as community bankers, providing loans for local businesses who do not qualify for bank loans. These loans have interest rates of 8 to 14 %, making them a decent option in comparison to cash advances.

*Asset based lending is comparable to upscale business pawn shop lending: these lenders buy a business owner's assets, or invoices, at 80-90% of the value upfront and provide the borrower with the remaining 10-20% when the invoice is paid off. Due to the high interest rates and credit requirements associated with these loans, they may not be the best alternative to traditional bank loans.

*Lease backs are useful for business with land, as in a lease back a business sells its real estate or equipment for cash and then leases the property back. This provides the business with instant cash, but increases monthly expenses as the lease must be paid over the course of ten to twenty-five years.