Loans and collateral have always gone hand in hand. Collateral provides some security to the lender. If the debtor fails to pay the debt or absconds, the lender still has some asset of the debtor in hand.
Small businesses are usually very close to the lives of the business owner. A very large portion of the owner's time and money is invested in the business. Changes in the financial position of the business are felt in the business owner's life too. If the business fails, the business owner's life can also fall apart.
Small businesses are often in need of finance. All banks require posting of collateral before sanctioning loans. The collateral will usually be personal for small business owners – house, car, etc. The penalty of non-payment becomes direr as the business owner can lose much more than just the business.
Merchant cash advance (MCA) is one financing source that allows small business owners to borrow money without risking the loss of their personal assets.
Funding the business with cash out refinance plans
Many small business owners take out home loans and cash out refinance arrangements to fund their business. These loans usually have lower interest rates than business loans. The loan term is long and the interest is tax deductible. Using the home loan to finance the business can prove very costly if the business does not work out. The bank will seize the house, posted as collateral, to recover the home loan.
Merchant cash advance does not need collateral
MCA providers finance small businesses without asking for collateral. They verify the credit card sales of the business and its credit rating before approving the business owner's application for a cash advance. This information is easily available and is used by most creditors before advancing credit.
MCA providers do not need securities, as they take a cut out of the credit card sales of the business for a specified time period, till the advance and the premium is recovered. This affects the profit margin of the business, but the business owners do not have to stake their personal possessions for the funds.
Once the contract is signed, the business owner cannot opt not to pay the MCA provider. The credit card payments are handled by the processor, and the MCA provider is guaranteed payments till the time the business stops making credit card sales.
Verifiable credit history and assured payment through credit card sales are the factors which make MCA providers confident of payments without needing the assurance of collateral.
Which is a better option – loan or MCA?
There is no one answer to this question. It really depends on the situation of the business. If the business is doing well, taking a home loan or commercial loan to expand the business makes sense. However, if the business is not doing well and needs funds urgently, an MCA is a better option as it takes less time to process and does not need the surety of collateral.
Businesses are always on the lookout for better financing options. Mixing them up is a good way to distribute the financial load and mitigate risk. Businesses can take out bank loans when they are confident of repayment within a specified time. Merchant cash advances are a useful option when business owners need funds immediately and cannot stake personal assets.