The introduction of alternative lending sources has changed the lending industry in no small way. Alternative lenders from the very onset were concerned with filing some of the many loopholes that were found in the traditional lending industry. The industry has also witnessed a rapid growth in recent years, one that could not have been anticipated. The growth of such alternative lenders such as those offering cash advance cannot be said to be surprising since a growing number of businesses are finding it very difficult to obtain loans from commercial banks and other traditional financial lending institutions.

It was observed that a little above 57 percent of small businesses could not access commercial bank loans. The figure included those that were turned down by the banks themselves and those that did not bother to apply as a result of the low approval rates. The reason why businesses have failed to obtain bank loans and are turning to alternative lenders, particularly those in the cash advance sector vary.

Read More: All You Need to Know About Unsecured Business Funding

Why Bank Loans are Just Difficult to Obtain and Why Merchant Cash Advance is the Better Option


The main reason has been that of collateral since most businesses are usually unable to come out with the collateral of commercial banks which are usually in the form of real estate. One report showed that percentage of small businesses that were rejected for inability to provide suitable collateral was somewhere around 43 percent. This figure is quite significant and as should be expected such businesses have to resort to merchant cash advance vendors that provide loans, so to speak, without requesting for collateral. Indeed, in any typical merchant cash advance transaction, it is the lender that bears all of the risks and stands to lose his investment if the business falls into hard times and is unable to survive—maybe as a result of natural disaster or some other unforeseen occurrences.

Credit Score

The other leading cause of small businesses being unable to get loans is because of the insistence of traditional lending institutions, particularly commercial banks, that the business must have a strong credit score of at least 650. Although the insistence of commercial banks on good credit scores is somewhat justified since it is the credit score that gives a vivid description of how the merchant has behaved in previous loans, it poses a major obstacle to small businesses that would otherwise have been able to repay the loan. Because of this, merchant cash advance providers do not base their decision on whether or not a business is creditworthy on credit score, even though the providers generally require a minimum score of around 500. A merchant loan is issued purely based on the ability of the merchant to repay through credit card sales. This means that once a merchant vendor is satisfied that the business is generating substantial monthly revenue of around $5000, it quickly proceeds to issue the cash advance to the business if other minor criteria are met. Meanwhile, businesses that are looking to improve their credit scores can rest assured that a merchant loan cannot impact on their scores since the transaction is legally considered to be a sale between two businesses. However one might see it, the reduction of the credit score requirement ensures that more businesses have ready access to business funding.

Weak Business Performance

Weak Business performance is another significant reason why small businesses are being unable to secure financing for the growth and expansion of their businesses. In reality, small businesses have quite a challenge since the end of the recent economic recession in the country. As a result, it has been found that the issue of weak business performance has resulted in the rejection of about 37 percent of loan applications by small business. For a cash advance, however, all of the emphasis is placed on the monthly credit sales without much hassle about whether or not the business is actually turning much profit.

As long as a business fulfills the vast majority of its business transactions using credit cards, and as long as the requested loan amount does not exceed two to four times of the monthly sales of the business, an advance can be very easy to obtain. In fact, the alternative lending industry and merchant cash advance providers, in particular, have recorded so much success to the extent that the total lending from alternative sources to small business is now somewhere around 4 billion in a single year.

Read More: What is a Merchant Cash Advance and What Kind of Business Uses it?

Merchant Cash Advance in detail

There are, of course, other reasons why small businesses would generally not opt for small business loans. Some of the reasons could bother on speed and approval rate. It is quite easy to obtain a merchant loan since only minimal documentation is required. In most cases, the loan can be delivered to the business in a matter of hours depending on the amount that is being requested. The approval rate of a merchant cash advance is also higher, meaning that a business can almost be certain that it would obtain the advance even before applying. An approval rate of more than 90 percent is surely something a business would look forward. Before we end our discussion of merchant loans, it must be made clear that a merchant advance is not a loan in the traditional sense of the word. It is simply a commercial transaction where a business sells a portion of its future receivables in exchange for a lump sum of cash. Interest is not charged on an advance; rather, a fixed fee is paid in the form of a special form of factoring. The factor rate is normally used to multiple the actual cash advance to arrive at the total amount payable by the business. Thereafter, a fixed percentage of the daily credit sales is deducted and remitted to the merchant loan provider. This arrangement is often facilitated by the credit card processor of the business. The merchant continues to make daily payments until the whole advance been repaid.

So far so good, we have seen some of the benefits that come with merchant cash advance. Small business owners are gradually beginning to recognize these benefits and that is what explains the popularity of merchant cash advance.