What Loans and Alternative Credit Options Are Available for Small Businesses?

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A business may require an extra amount of money for a variety of reasons. Certainly, one of those reasons is that trade is seasonal or just difficult presently, and a cash injection is needed to keep it afloat. In other situations when wanting to take advantage of growth opportunities in the market or open up another retail store, then funds are often needed beyond the profits to fund growth.

Let’s explore a handful of ways a small business can get new funding.

Merchant Cash Advance

If you want to bypass the bank for whatever reasons, a merchant cash advance (MCA) can be a good idea.  These are billed as a fast and flexible form of finance, with most borrowers receiving a lending decision within 24 hours of applying.  The way a cash advance works is that a business owner applies for a certain amount of credit, and then is required to pay the money back when it starts making sales.  So, in effect, you are receiving a cash advance that is repaid through transactions in the future.  Expect to receive up to £500,000 with this kind of loan.

A merchant cash advance (MCA) is a way for a company to take their future receivables received by credit card payments and use them to fund an emergency loan. A merchant cash advance is different than a loan in that lenders essentially pre-purchase some of your credit card transactions, “advancing” the money to you. They will “owe” some of your future sales, and will collect the money from those sales. Unlike loans, cash advances technically don’t have an interest rate, or a set repayment period. Instead, you repay by taking a percentage of your credit card sales each day until you’ve repaid the balance and the fee agreed on.

It’s also somewhat similar to factoring where the value of future invoices supports an advance to keep a business going, but in that case, all invoices go through the factoring company which suppliers and clients will be aware of.

Line of Credit

A business banking line of credit is another option to raise short-term monies to handle a payroll shortfall or planned expansion opportunities. A line of credit is usually provided for a much smaller amount than an MCA and is usually offered between £2,000 and £50,000+ depending on the size of the business applying and its standing with the bank.

One of the benefits of this type of transaction is that a business can draw down on part of the line of credit, as needed, and only pay for the credit as it’s used. This is different from a term loan, which is a set amount repaid over an agreed repayment term which lacks this kind of flexibility.

Business Term Loan

A business term loan is one that can be guaranteed by the Small Business Administration (SBA). These types of loans are often referred to as 7A loans, and purely used by businesses. To qualify for a 7A loan, the business must have been operating over two years, the applicant must have a credit rating over 679, apply for a loan value over £30,000, revenues must already have surpassed £50,000 in the trailing 12-month period, and the business must be operating profitably. The advantage of a 7A loan is really the cost of financing. Rates range from 6.5% to 9% with the maximum mandated by the SBA to qualify.

There are also other types of business term loans that may not be covered by the SBA scheme with different requirements and interest rates charged. However, typically the cost of finance for a business term loan is substantially lower than a merchant cash advance, factoring or a line of credit with your bank.

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