As a small business owner, you may have encountered the option of a merchant cash advance alternative as a way to access quick financing. While MCAs can provide a fast infusion of cash, they often come with high fees and unfavorable terms that can ultimately do more harm than good for your business.
In this article, we’ll explore the drawbacks of merchant cash advances and dive into several alternative financing options that may be better suited for your small business needs. From traditional business loans and SBA loans to crowdfunding and invoice financing, we’ll cover the pros, cons, and key considerations for each option to help you make an informed decision.
What is a Merchant Cash Advance?
A merchant cash advance (MCA) is a type of alternative financing where a funder provides a lump sum of cash in exchange for a percentage of your future credit card or debit card sales. The funder typically takes an agreed-upon percentage of your daily or weekly sales until the advance is repaid, plus any associated fees.
Traditional Business Loans as an Alternative to Merchant Cash Advances
One of the most common alternatives to a merchant cash advance is a traditional business loan from a bank or other financial institution. These loans typically have lower rates, longer repayment terms, and more predictable monthly payments compared to MCAs.
The application process for a traditional business loan may be more involved, requiring more documentation and a thorough review of your business financials. However, the lower costs and more favorable terms can make this a more sustainable option for many small businesses.
When considering a traditional business loan, it’s important to shop around and compare offers from multiple funders to find the best fit for your needs. Additionally, be prepared to provide detailed financial information, a solid business plan, and potentially collateral to secure the loan.
Small Business Administration (SBA) Loans as an Alternative to Merchant Cash Advances
Another alternative to a merchant cash advance is an SBA loan, which is a loan partially guaranteed by the U.S. Small Business Administration (SBA). SBA loans typically offer lower rates, longer repayment terms, and more favorable conditions compared to traditional business loans or MCAs.
Some of the most popular SBA loan programs include:
- SBA 7(a) Loans: These are the SBA’s primary loan program, offering financing for a variety of general business purposes, such as working capital, equipment, or real estate.
- SBA 504 Loans: These loans are designed to support the purchase of major fixed assets, such as commercial real estate or equipment, and are typically used for expansion or modernization projects.
- SBA Microloan Program: This program provides small, short-term loans of up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand.
To qualify for an SBA loan, you’ll need to meet certain eligibility criteria, such as being a for-profit business, having a good credit history, and demonstrating the ability to repay the loan. The application process can be more involved than a traditional business loan, but the potential benefits make it a worthwhile option to consider.
Crowdfunding as an Alternative to Merchant Cash Advances
Crowdfunding is another alternative to a merchant cash advance that allows you to raise funds from a large number of individual investors or backers, typically through an online platform. This can be a particularly useful option for businesses with a strong community following or unique products or services that can generate significant interest.
There are several types of crowdfunding platforms to consider, each with its own approach:
- Rewards-Based Crowdfunding: Backers receive a tangible reward, such as a product or service, in exchange for their contribution.
- Equity Crowdfunding: Backers receive an ownership stake in the business in exchange for their investment.
- Donation-Based Crowdfunding: Backers contribute without the expectation of a reward or return on investment.
The key advantages of crowdfunding include the ability to raise funds without taking on debt, the potential for building a strong customer base, and the opportunity to gauge market interest in your products or services. However, it’s important to carefully research the various crowdfunding platforms, understand the associated fees and requirements, and develop a compelling campaign to attract backers.
Invoice Financing as an Alternative to Merchant Cash Advances
Invoice financing, also known as accounts receivable financing, is a financing option that allows you to access the cash tied up in your outstanding invoices. This can be particularly useful for small businesses that have strong accounts receivable but may be experiencing cash flow challenges.
In an invoice financing arrangement, a funder will advance you a percentage of the value of your outstanding invoices, typically 80-90%. Once your customers pay the invoices, the funder will then deduct their fees and remit the remaining balance to you.
The key benefits of invoice financing include:
- Improved cash flow: You can access the cash tied up in your invoices before your customers pay.
- Flexibility: Invoice financing can be scaled up or down based on your changing financing needs.
- Potentially lower costs: Fees for invoice financing may be lower than the high costs associated with MCAs.
However, it’s important to carefully review the terms and fees associated with any invoice financing arrangement to ensure it aligns with your business needs and financial goals.
Small Business Grants as an Alternative to Merchant Cash Advances
Small business grants can be another alternative to a merchant cash advance, providing funding that you don’t have to repay. Grants are typically awarded by government agencies, nonprofit organizations, or private foundations, and they can be used for a variety of business purposes, such as startup costs, expansion, research and development, or specific projects.
The application process for small business grants can be competitive and time-consuming, but the potential benefits can be significant. Some key considerations when exploring small business grants include:
- Researching and identifying relevant grant opportunities based on your business type, location, and funding needs.
- Carefully reviewing the grant requirements and eligibility criteria to ensure your business qualifies.
- Developing a strong grant proposal that clearly articulates your business objectives, the proposed use of funds, and the potential impact of the grant.
- Being prepared to provide detailed financial information, a solid business plan, and any other required documentation.
- While securing a small business grant can be a challenge, the potential to obtain funding without the need for repayment or high fees can make it a worthwhile option to explore.
Personal Loans as an Alternative to Merchant Cash Advances
Another alternative to a merchant cash advance is a personal loan. Personal loans are typically unsecured, meaning they don’t require collateral, and they can be used for a variety of business purposes, including working capital, equipment purchases, or debt consolidation.
The key advantages of a personal loan include:
- Potentially lower cost of capital compared to MCAs
- Predictable, fixed monthly payments
- Flexibility in how the funds can be used
However, it’s important to note that personal loans are typically based on your individual credit profile and may not be suitable for all small businesses. Additionally, using personal loans for business purposes can blur the line between your personal and business finances, which can have tax and legal implications.
Peer-to-Peer Financing as an Alternative to Merchant Cash Advances
Peer-to-peer (P2P) financing is another alternative to a merchant cash advance that connects individual investors with borrowers through online platforms. P2P funders may be able to offer more favorable terms and lower cost of capital compared to traditional funders, as they are not subject to the same regulatory requirements.
The application process for a P2P loan is typically more streamlined than a traditional business loan, and the funds can often be accessed more quickly. However, it’s important to thoroughly research the various P2P lending platforms, understand the associated fees and risks, and ensure that the loan terms align with your business needs.
Conclusion: Choosing the Best Alternative for Your Small Business
When it comes to financing your small business, it’s essential to carefully evaluate all of your options and choose the one that best fits your specific needs and financial goals. While merchant cash advances may seem like a quick and convenient solution, the high fees and unfavorable terms can ultimately do more harm than good.
By exploring alternatives such as traditional business loans, SBA loans, crowdfunding, invoice financing, small business grants, personal loans, and peer-to-peer financing, you can find a financing option that provides the capital you need while aligning with your long-term business objectives.
