It’s not always easy to get short-term business loans when they are needed, but there are little-known financing options that can put more money in your bank account and less stress in your day.
Businesses are constantly running into financial emergencies that put a strain on the company’s cash flow. When such a problem arises, the solution is normally straightforward. If the problem to be solved is “How are we going to pay for it?” whether it is equipment replacement, giving raises to employees, or dealing with a cash crunch due to slow-paying customers, it’s the financing of the initiative that is the primary problem.
Table of Contents
- Businesses Often Rejected by Traditional Business Lenders
- What is a Business Payday Loan?
- Are Business Payday Loans the Same as Merchant Cash Advances?
- Alternative Business Financing Options
- Are Business Payday Loans the Best Financing Option?
Businesses Often Rejected by Traditional Business Lenders
Successful businesses weren’t always successful. They travel over a bumpy road with many highs and lows. The highs are easy to manage, but the lows can have a lasting impact on a company’s credit history. Struggling to pay bills in the early years is a common occurrence and its normally only the sheer determination of the owners to “make it work” that the business has thrived since.
But that pesky negative credit history is now in the way of continued success. While the owner(s) should be lauded for steering the company through rough seas and avoid becoming another statistic of failed companies, they are often rejected for additional business loans from traditional lending institutions.
That’s where non-traditional lending sources come into play. They take a holistic perspective by placing emphasis on the success the company is currently experiencing and where they are headed, rather than focusing on prior problems that every start-up business encounters.
Some will advise business owners to avoid alternative loan options due to predatory practices by some lending companies. But not all alternative lending companies are created equal. While there are some who take advantage of desperate owners and eventually drive them out of business through excessive debt, there are many more who work with you to help you succeed and become a long-term client. The key is to research lending sources and types of business financing that fit within your business model.
This article discusses short-term financing options through business payday loans.
What is a Business Payday Loan?
Many business owners are surprised to learn that a business payday loan is a short-term financing option. It’s a traditional loan by definition and is regulated by state laws. The loan is issued for a short period of time and subject to an Annual Percentage Rate (APR). The borrower typically writes a post-dated check or agrees to an electronic payment agreement for the loan amount, fees, and interest and receives a loan in cash. The payment is processed by the financing company on the agreed upon date and the loan is closed.
A business payday loan is best used on an extremely short-term basis or the interest charges can become prohibitive. For example, say you’ve received a check from a customer, but your bank puts a 5-day hold on it until it clears the customer’s bank. But you need funds immediately to make payroll. You know the money is available in five days so take a 5-day business payday loan to meet your obligations and keep interest charges to a minimum.
How Business Use Payday Loans
A payday loan for business can be used for any purpose the owner deems appropriate. It’s best to use the loan proceeds for short-term working capital needs due to the high cost of financing. It should be used as a credit card, only when absolutely necessary and paid back quickly. There are several business loan options available for medium- and long-term financing needs that are more appropriate and less costly.
Advantages of a Business Payday Loan
The primary benefit of a business payday loan is the quick approval process. Business owners can be approved and have the cash available within as little as 24 hours. After paying back the loan as agreed, subsequent transactions are often approved immediately. Additionally, borrowing and paying back business payday loans has a positive impact on credit scores.
Disadvantages of Business Payday Loans
The primary disadvantage of payday loans for business is that they are generally more expensive than other financing options like inventory loans or invoice factoring. Additionally, this type of business financing can put a strain on future cash flow which can result in payday loan dependency. They should only be used for emergencies and not as a regular financing source.
What Documentation is Required for a Business Payday Loan?
Are Business Payday Loans the Same as Merchant Cash Advances?
No. While similar, business payday loans are truly loans a business loan is issued for a specific term with an interest rate stated as an APR.
Merchant Cash Advances are classified as a business-to-business transaction where an advance is issued in return for a percentage of future company receipts. The lender takes a percentage of daily or weekly receipts as payment for the cash advance.
Alternative Business Financing Options
Before applying for a business payday loan, it’s advisable to investigate more affordable financing options. The following may help solve your company’s cash flow problems more effectively.
Company Credit Card
Many companies can qualify for a company credit card even with a history of low credit. The card may carry high APR interest, but if it’s used strictly for short-term needs and paid off by the due date, it’s a cheaper option than business payday loans. Regularly paying the debt by the due date will boost your credit score as well.
Short-Term Working Capital Business Loans
You may be discouraged from thinking that Working Capital Loans are a possibility because your bank has denied your application. But online lenders are still an option for receiving a working capital loan even with credit issues. Generally, you must be in business for at least one year and have a minimum monthly revenue of $10,000.
Inventory Business Loans
Inventory loans are an option for retailers, wholesalers, and contractors. Retailers and wholesalers may need an infusion of funds to purchase bulk inventory to prepare for seasonal sales. Or a contractor may need an inventory loan to purchase materials to complete a project. Inventory loans are generally available to companies with a proven track record and a decent credit history.
No, Low, or Bad Credit Merchant Cash Advances
As mentioned previously, Merchant Cash Advances involve money being issued to the borrower in exchange for a claim on future business receipts. There is less importance on your credit score because the advance is secured through future sales. You’ll be required to prove that you have an established business with steady revenue streams. Approval rates for Merchant Cash Advances are as high as 90% and money can be available within a few days, making it an easy online business loan option.
Are Business Payday Loans the Best Financing Option?
It depends. For many owners, alternative lower-cost sources of business financing described above meet their immediate needs. For others, having access to an easily available source of short-term funds is all they need to keep business rolling along.
Nevertheless, it’s important to be aware that out-of-control borrowing with business payday loans can start you on a path to debt dependency. If you find yourself in that situation, you may be able to consolidate your debt by applying for more affordable financing as described above.