Practical Alternatives to Merchant Cash Advances

Merchant cash advances are usually not a good option for emergency financing. With this type of loan, you receive a lump sum from a creditor who often approves you without any application. The creditor does this by offering a high interest rate that is charged through a percentage of future sales. In a week economy where loans are hard to secure, merchant cash advances become more popular. However, securing a business loan will always save you money over this alternative financing.

Small Business Administration Guaranteed Loans

The Small Business Administration offers a wide array of programs to guarantee loans meeting their qualifications. If you qualify for an SBA loan, you will receive much less expensive financing, even through a traditionally difficult lender. Companies should have fundamentally sound financial balance sheets in order to qualify for most of these small business loans.

If you are looking for start-up financing, you will be judged largely against the character and financial strength of your principal owners. Your business plan will also come into play, however, as well as other factors such as your ability to diversify your local marketplace. The SBA aims to encourage even economically-disadvantaged entrepreneurs to grow their businesses. This means you will be judged on other criteria than your financial status alone.

Asset-Backed Loans 

If your business has assets, you can likely get a loan. You may not have the option or the desire to sell off your assets in order to get the funds needed to start or expand your business. Asset-backed lending allows you to use the equity you have in real estate, equipment or even stocks and investments to receive immediate liquidity you need for your business to succeed. 

Asset-based loans do come with some risks. When you place an item as collateral, you turn over ownership of that item to the lender for a short period of time. Once you fulfill the terms of the loan, you will receive the asset back untouched. However, if you fail to keep up your end of the loan terms, you will lose possession and ownership of your asset permanently.

Mezzanine or Subordinate Loans

Subordinate and mezzanine loans are a type of unsecured loan that offer the lender the opportunity to share in your business profits or ownership. While this may sound like a merchant cash advance, this option is actually quite different. Merchant cash advances often come from financial companies looking to target those retailers and businesses that do not meet basic loan qualifications. They aim to put in place deceivingly high interest rates that take advantage of a business's lack of financial standing.

Mezzanine and subordinate loans usually come from a hedge fund, private equity group or other small investor. These investors consider your business's chance for future profits based on your business plan. Instead of taking advantage of your weak position, they look to strengthen that position and give you a better chance at success. While subordinate loans are expensive, they can be a great option to receive funds from investors that allow you to expand and prosper.