Merchant Cash Advance (MCA) is not a loan but is a payment paid in advance by an MCA provider based on your credit card transaction. You will then pay a percentage of your daily or weekly credit sales until the amount has been paid all. This is a suitable funding option for businesses that receive most of their payments through credit cards, such as restaurants, beauty salons, and retail companies.
With the increasing number of alternative lenders, various funding solutions can now be used by small business owners. The following is a brief summary of the general types of working capital loans available:
As can be understood from the name, short-term loans are loans with a certain amount that are set to be repaid in a short time – usually six months. Loans must be repaid in regular installments, which have been calculated along with fees and interest.
Compared to long-term loans, short-term loans offer lower loan limits and have higher interest rates. These loans often have loan terms that are more flexible and easier to fulfill. Therefore, this type of loan is a suitable choice for newly established businesses.
Business Credit Line
A credit line, or also known as revolving credit, gives business owners access to a number of previously agreed-upon capital. You can imagine the principle of credit lines such as credit cards; this is a facility that you can use when you need it and interest will only be charged according to the amount withdrawn. When the amount is withdrawn is late, your credit limit will rise again as before.
Receivables Financing Loans
Receivable financing loans are short-term financing solutions that allow companies to borrow based on unpaid invoices. By using receivables as collateral, you will get a deposit of 70 to 90 percent of the amount stated on your invoice. After customers pay off their invoices, you will receive the remaining balance (minus interest and processing fees).
Working capital loans are designed to fund the daily operational expenses of a company, such as purchasing inventory or payments to suppliers. This type of loan usually has a short repayment period and is not intended to finance long-term business needs such as major renovations, large-scale expansion projects, or equipment purchases.
Before we turn to the use and type of working capital loans, let’s discuss the two main concepts that are relevant first: working capital and working capital liquidity.
There are various working capital needs and this usually depends on your business and industry. Below are some goals why small business owners usually need a working capital loan:
Having a list of important criteria can help determine which funding solution is right for your needs. Below are some questions and criteria to include in your list:
How fast do I need funds?
You might not be able to wait for several weeks to get access to funding – as is the case for urgent equipment repairs, or when you need additional funding to fund large scale business projects.
In the scenario above, traditional lenders may not be suitable because they tend to have a strict application process and a longer approval period. It’s not unusual for a business to wait a few weeks before getting news about the status of their loan application.
Will Loans Increase the Financial Position of My Business?
Certain types of funding solutions, such as Merchant Cash Advances, have large fees and narrow payment terms. Therefore, there are many bad possibilities that can occur if business owners are unable to make repayments – they may be trapped in a spiral of debt, taking many other loans to pay off the outstanding balance from previous loans.
Before you commit to a loan, you need to be absolutely sure that you will be able to fulfill your payment on time – and that the loan brings benefits that are greater than the cost.
Do I understand the overall cost of a loan?
Whatever business loan you will choose, it is important that you pay close attention to payment terms and understand all possible costs that can be your responsibility. Always ask for detailed costs and pay attention to requirements that allow changes in interest rates, as well as clauses that can speed up payment obligations.
What is the ROI (Return of Investment) of a Targeted Loan?
Although getting additional funding is often the key to growth, there are times when a loan is not the right solution for the condition of your business. “Will borrowing bring more money than it costs?” This is an important question that you must answer to assess the ROI of a loan.
Ideally, you should use funds obtained for investments or activities that will generate growth or income, or cause a significant reduction in your costs – such as purchasing inventory or repairing equipment – and not spending such as office renovations, because this will result in a negative ROI.
Simply put, working capital is used to pay short-term obligations while long-term business funding needs are related to investments or activities that have an impact on your company’s long-term growth – such as massive renovations, expansion to new locations or equipment purchases.
Differentiating these two types of needs is key to avoiding problems that might arise from choosing a funding solution that doesn’t suit your needs.
Here’s an example: Credit lines are best suited for short-term needs because of the flexibility they offer – business owners can withdraw from the credit line at any time, and there are no limits in terms of the purpose of using the funds. However, if a borrower uses a line of credit for long-term expenditure, this will limit his access to funding if there are urgent costs that arise suddenly.
Want to get a working capital loan? We will provide some tips that can help you get approval on your loan application:
Give clear reasons and usage plans
A clear usage plan will allow lenders to assess whether the loan you want to take is right for your business (or to suggest a more suitable alternative) and to evaluate whether your business will make a good investment using the funds provided.
To grow more trust, you can show concrete plans in terms of using funds and how they will contribute to the growth and success of your business. For example, if you get funds for marketing activities, it’s good to prepare a summary of your marketing strategy, highlight past projects and strategies that have been successful and show how you will use the loan to repeat that success.
Clean and clear notes in a bank account
Lenders want to see a clean bank account – which shows regular deposits, a healthy bank balance, and no overdraft – because this is an indicator that you have good control over your business finances, and chances are you will become a credible borrower.
If you have an overdraft, this does not mean that you have destroyed your chances of getting a loan application agreement. Be prepared to explain why you submitted the overdraft; You must provide a background and reasons why you need access to funds at that time, along with other details such as the date and account number. Explain that this is a one-time incident, and show how you have implemented several actions to prevent similar incidents.
Provide documents to support your cash flow projections
Regular lenders want to assess whether your cash flow projections are realistic and not too far from your industry benchmark or past performance. In addition, they also want to see if you have prepared enough space so that you can still fulfill your payment obligations even though there are unexpected costs that arise.
Therefore, it is important for you to include documents that can support the projected cash flow into your application, such as the final invoice, list of debtors that can be billed, proof of order or confirmed contract, and the latest transaction data (for B2C businesses).
Build a good personal credit score
For small businesses – especially newly established businesses without a clear credit history – your personal credit score is an important factor to consider when lenders assess your loan application. Personal credit scores are an indicator of how reliable you are in managing your financial obligations; if the business owner has a good personal credit record, it is safe to assume that he will also be able to manage business finances properly and pay for working capital loans in a timely and consistent manner.