Many small business owners enter their new business alive, full of hope and wishful prosperity while diving in with two feet into the difficult world of entrepreneurship. Unfortunately, many entrepreneurs run into a constant debt cycle, where they are borrowing money to pay bills without realizing the risks they are gambling with – paying large sums or revenue, fees and interest rates.
To help entrepreneurs understand business cash advances, there are four vital steps to consider.
- When applying for a short-term cash loan, always consider this the last option. Take a step back and read all the paperwork, looking at the investment lenders, Small Business Administration (SBA) lenders, amortization rates and interest rates.
- Before taking out a working capital loan, ask vendors questions. For example, will they be flexible with payments? If they charge fees, will they be less with short-term pay off loans?
- If a business owner pursues a business line of credit or a cash advance, it is possible to have the lender calculate daily payments. These payments automatically deduct from the business owners’ checking account daily until the loan is 100% paid off. Business owners need to think long and hard about if they can handle this regimented financial commitment.
- Lenders generally encourage borrowers to apply for the shortest loan. There are many cases, where the longest loan, which offers the smallest daily payment, may be more financially in tune with the borrower’s needs. While this loan may cost the borrower more in interest and fees in the long run, it can also help provide necessary cash flow immediately, without voiding other necessary funds and requiring borrowers to take out additional cash advances.
Entrepreneurs need to educate themselves about the differences between different types of cash advance loans. Many traditional banks do not lend money to entrepreneurs because they offer too great of risk. While it is necessary that entrepreneurs be given resources to have additional funds available, it is also important that they are well informed about the different types of loans available and how they personally influence their companies’ financial resources and assets.
This type of industry is largely unregulated, which means that it is up to each entrepreneur to understand the industry and the specific impact that merchant cash advances have on their businesses.
The bottom line is that it takes abundant research and knowledge to find the right type of cash advance loan for each type of business.