Cash Advance Loans for Small Businesses Carry Steep Price

Critics of predatory lending practices recently turned their attention to business cash advance loans, which some people have characterized as “payday loans for business,” according to a report published at Time.com. These cash advances for business owners can put them in debt spirals that mirror payday lending cash loans. The Time.com report explained that 7 percent of small business owners in 26 states applied for these business cash loans in 2015, and in Florida’s competitive business environment, nearly one out of five businesses, or 18 percent, applied for merchant cash loans.

How Business Cash Advance Loans Work

Cash advance loans carry high annual interest rates of annual that often top 300 percent. Payday loans usually require borrowers to grant permission for lenders to debit their bank accounts directly with an online check on the date that the loans are due. In return, borrowers get approved quickly and often receive their funds within 24 hours. Merchant loans work similarly by getting money into the bank in as little as 72 hours. Business borrowers pledge future credit card receipts as collateral for direct debits of scheduled loan payments according to Firstamericanmerchant.com.

Many businesses appreciate this loan option because loans are widely available and repayments are automatically deducted without fixed monthly payments that could compromise business operations. Lenders get paid when borrowers get paid from their customers, which offers a win-win for many businesses that encounter slow-paying clients or seasonal ups and downs in sales activity. In effect, businesses are selling their future sales to bypass the problems of securing traditional business financing. In this way, these loans work like invoice factoring. The problems of getting traditional business financing include:

  • Long wait times for funding
  • Requirements for extensive business documentation
  • Low approval rates
  • Complex loan terms
  • Strict credit-approval policies based on credit scores

Cash advance loans offer easier terms based on the following policies:

  • Fast request procedure
  • No need to provide extensive financial reports and tax returns
  • Greater loan flexibility
  • Receipt of funds within 72 hours
  • Approvals for principles with credit scores under 500

Cash Loans for Merchants Ostensibly Fall Outside CFPB Jurisdiction

These cash advances aren’t technically loans, so they fall outside the jurisdiction of lending regulators like the Consumer financial Protection Bureau, or CFPB. Terms can vary widely because business practices in the United States are enormously complex and competitive. Supporters of these loans point out that businesses–which can also get caught in high-interest debt spirals–can’t make the same claims of unfairness that payday lending critics make of lenders that target uneducated borrowers. Business is always a gamble that can return great rewards or cost owners everything they own. Critics complain that middlemen who broker these deals often earn 10 percent off the top, but investment financiers often claim a percentage of the businesses that they finance and earn millions of dollars for modest cash investments.

CFPBmonitor.com reports that some people worry that the CFPB’s penchant for expanding its mandate to regulate financial products beyond what was authorized by the Dodd-Frank Act will soon turn its attention to merchant loans. For example, the CFPB recently demonstrated an aggressive stance against pension advance traps that consumers should avoid based on a lawsuit jointly filed in a California federal court by the CFPB and New York Department of Financial Services.

Best Practices for Requesting Cash Advance Loans

Debanked.com predicts that 2016 will bring greater variety in alternative business financing approaches, more private business funders and lenders and lending syndicates. The organization recommends that business borrowers exercise caution when borrowing money for any purpose and use the following “SMART” practices to estimate future earnings and the potential benefits of cash infusions:

  • S: Goals must be specific.
  • M: Estimates must be measurable based on real-world trends.
  • A: Goals must be attainable and not just pipe dreams.
  • R: Plans must be realistic.
  • T: Borrowing should always be time-bound.

Merchant Cash Advances Grow at an Accelerated Rate

Supporters of alternative financing and merchant cash advance loans mention that the industry is growing at an astonishing rate according to Greensheet.com. The trend is hotly debated by entrepreneurs, merchant-level salespeople and industry critics, but supporters claim that traditional banks aren’t meeting the needs of small businesses, so owners are forced to consider alternative financing options to survive during slow periods or to capitalize on time-sensitive business opportunities.

Merchant cash advance loans–despite similarities to payday and other short-term loans–play in a different ballpark and league than consumer financial services. The same concerns that plague payday lending just don’t get started to sophisticated business owners who understand the risks and bet on their abilities to use loan funds to earn enough to repay their obligations and build equity and capital in their businesses. Find out more about cash loans and business credit and investment policies at the PersonalMoneyStore.com.

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