Recent competition in alternatives for bank loans means good things lie in the future for small businesses with big plans. This fresh competition is forcing established player to adjust what they offer consumers.
Since the recession, small businesses have turned to merchant cash advance providers for help, especially when banks reject them for lack of collateral. This type of nonbank lender advances cash quickly. In return for their services, they collect a portion of future sales by daily extracting from the borrower’s credit card receipts.
Mr. Ivan Rincon is the owner and founder of online swimwear shop Orchid Boutique in Miami. In an interview in March 2014 with The New York Times, Rincon stated that “The lender took 15 percent of his sales daily until it had recouped the $255,000 — at an effective annual interest rate of more than 50 percent.”
The amount he was given in 2012 in this merchant cash advance was $200,000, of which he agreed to pay $55,000.
Sometimes an advance is not always the best option for a business. Looking back, Rincon does not feel that the merchant account advance was necessarily the healthiest choice for his business, considering how unclear the terms were.
The New York Times reports that “Alternative lending has filled a gap left by risk-averse banks: big banks approved less than a fifth of all requests for small-business loans they received in January, while small banks approved about half of such requests, according to a survey by Biz2Credit, an online platform that matches businesses and lenders.”
Small business loans are strict on credit requirements and have long wait times for funding. In addition, they involve complicated contracts and extensive documentation.
On the other hand, merchant cash advances offer cash for those who do not have incredibly high credit scores. They also offer funding more quickly than small business loans. Their offers are all together more simple and flexible.
In addition, alternative lending has opened up even more options. According to The New York Times, they combine digital innovation and efficiency with true term loans. Their rates may be higher than those charged by banks, but they are also lower than short-term alternative lenders and merchant cash advance offers.
As the competition increases and providers embrace technology, more and more options will become available.
For small businesses, this is good news in light of their big plans for the future, contact us today!