Businesses that turn to merchant cash advances often find that the high credit cost causes significant cash flow problems. Many business owners find that a merchant cash advance can give them the funding within a couple of days, which sounds great until they learn that merchant cash advance companies require incredibly high finance charges—sometimes as high as triple-digit interest rates.
It’s relatively easy to qualify for a merchant cash advance, so many business owners consider them when they’re in a pinch. Considering that most consumers prefer using credit cards over other payment options, this is a financial product that gets pitched to most small business owners at one time or another.
If you have a client considering this financing option, you may want to encourage them to investigate other options before they sign on the dotted line. Here are three easy-to-qualify-for alternatives that are good alternatives to a merchant cash advance.
Vendor Credit
Vendor credit also goes by the names “trade credit” and “supplier credit.” With this financing product, business owners don’t have to pay upfront for the products they sell. Instead, the supplier gives them 30, 60, or 90 days to pay.
Vendor credit lets retailers float product costs for supplies that they are already buying. Paying on “net 30” terms usually comes without a financing charge, as long as the payment comes on time. Many suppliers also offer discount terms to their customers who pay their invoices early. For example, your clients might get a 10% discount if they pay their invoice within 10 days rather than waiting the full 30 days to pay an invoice.
Suppliers may not want to give vendor credit to new customers. However, after establishing a good track record of paying on-time, many suppliers are open to trying out net 30 terms. As the business owner earns the vendor’s trust, they could get approved for longer terms. Savvy business owners can sometimes establish net 60 or 90 day terms or even inhouse lines of credit.
Business Credit Cards
You might think that business owners would steer clear of business credit cards because they often have high interest rates. Instead, a Nav survey found that 22% of business owners say that their businesses rely on credit cards as their top funding resource when they need money.
Business credit cards have a lot going for them. First off, they’re easy to qualify for. Most business owners with a decent personal credit score can get at least one, if not multiple credit cards.
Secondly, many credit cards come with a 0% interest introductory offer for a period of 6-18 months. After the introductory period ends, interest can be avoided by repaying your balance every month. This makes them ideal funding solutions for temporary cash-flow emergencies.
They are also a good option for brand new businesses because they are easier to qualify for than a business loan or line of credit.
Even in the event that the business owner has to pay interest, 20% APR still beats what a merchant cash advance typically costs.
Short-Term Business Loans
Short-term business loans usually have terms under a year. Many of the loans have 90-day or 120-day terms. The faster you can repay the loan, the less you end up spending on interest. As long as a business knows that they have the cash flow to make timely payments, it probably makes sense to choose a short-term business loan instead of accepting a merchant cash advance.
The downside is that the lender often requires daily, weekly, or monthly payments. That could make short-term business loans problematic for businesses with a lumpy cash flow at the end of the month.
One upside of short-term business loans is that many of them can source funds quickly, often just as quickly as a cash advance.
There are plenty of short-term business loan offers online. It’s important that clients understand their options, including the costs and terms of the financing so that they can make an informed choice.
When a Merchant Cash Advance Can Work in a Client’s Favor
If your client has a solid plan for paying the money back and can’t get capital from a low-cost option, it could make sense to consider a merchant cash advance. They should still think twice before getting financing that costs as much merchant cash advances do. They’ve been death sentences for plenty of businesses.
Author Bio: Kali Geldis has a decade of experience guiding individuals through the confusing world of credit and finance. Her work has appeared on Business Insider, MSN Money, USA Today, and many other top tier publications. She currently serves as the Editorial and Marketing Director for Nav.