What Are The Advantages of a Merchant Cash Advance or ACH Bank Loan Compared to a Personal Loan?
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What Are The Advantages of a Merchant Cash Advance or ACH Bank Loan Compared to a Personal Loan?

You know the old saying, “desperate times call for desperate measures,” but when desperation turns into temptation when it comes to your business, sometimes these measures are not the solution. We’re talking about using a personal loan to keep your business afloat. Personal is personal and business is business for a reason. Sure, there are times when using some personal finances to help out your business is okay, but this is usually not the case when it comes to loans.

Personal Loans, Personal Credit, and Your Business

Personal Loans are installment loans that usually require collateral such as property, vehicles, or other personal assets. Although a lender may not wish to seize these personal assets if the loan is not paid back, a lien will be filed and they can go after your assets if they want to – not to mention, defaulting heavily impacts your personal credit score. A few weeks ago, we interviewed North Shore Advisor, Inc. Credit Expert, Tracy Becker. She mentioned, “Things changed dramatically. Banks have become more restrictive when it comes to personal and business lending alike, therefore, they require individuals to have a higher credit score threshold to receive the best pricing.”  

So, it’s easy to see why many business owners (especially those in the startup stage) believe that if they have a great credit score and use money acquired via a Personal Loan (often times, startup owners do not meet the necessary requirement to apply for Business Loans), this will help their business at the time, and eventually, when it comes to applying for business financing in the future. This is a nice thought, however, personal credit is not a reflection of a business’ credit and doesn’t help to build it either. So what does a business owner do when they don’t qualify for a traditional bank loan and don’t want to use a Personal Loan for their business? There is still hope. Let’s take a look at a Merchant Cash Advance and how it works for businesses.

What is a Merchant Cash Advance, an ACH Bank Loan, and How Do They Work?

The primary purpose of a Merchant Cash Advance or ACH Bank Loan is to service the financial needs of small to medium sized business owners. Unlike traditional business loans, funds from a cash advance or ACH Bank Loan disburse in as little as three to four business days. They do not require a minimum credit score to qualify, therefore, many rising businesses or businesses that run into a rough patch over the years opt to use this financing solution. Traditional bank loans also typically require some form or collateral to secure a loan. The collateral requirement causes many business owners to face the fact that they may lose precious assets in the event that they cannot make their required payments. Merchant Cash Advances or ACH Bank Loans, however, do not require any collateral to qualify, so business owners who have little to no collateral (or poor credit or limited business history) to offer can rest assured that nothing will be taken from them.

Finally, since Merchant Cash Advances and ACH Bank Loans do not necessarily have fixed payments, business owners who run into financial troubles over time do not carry the burden of large monthly payments, balloon payments and do not accrue over time (since they are classified as a purchase of future sales at a discount).. There are two common collection processes. With a Merchant Cash Advance, payments come from a set percentage of credit and debit sales. With an ACH Bank Loan (this financing product is typical for businesses that do not accept credit cards or want a set repayment schedule) the collection process is done through the Automated Clearing House (ACH) process. collection process is through the Automated Clearing House withholding method with fixed daily, weekly or monthly payments. This method allows the lender to withdraw a predetermined amount from your business bank account. Lastly, a lesser common method of collection is through a lockbox agreement. With this method, all of a business’s daily credit and debit sales are deposited into a lockbox account, in which the agreed upon repayment amount is removed by the lender.

To elaborate on the advantages a little further, unlike personal loans, Merchant Cash Advances and ACH Bank Loans do not carry compound interest – or interest calculated on the principal loan amount as well as accumulated interest. In layman’s terms, interest on the interest. Merchant Cash Advances and ACH Bank Loans have a set payment amount that is interest free and are calculated as purchase with one set cost for the funds provided. For example, if a business owner accepts a Merchant Cash Advance for a purchase price of $12,000 with a purchased amount of $16,000, they are receiving a $12,000 advance with an added set repayment fee of $4,000 on top. The only amount to be repaid is the full $16,000. No interest included. 

Another benefit is that Merchant Cash Advances, ACH Bank Loans, and many other alternative financing products do not reflect on the three major reporting agencies Experian, TransUnion and Equifax, therefore, these products do not impact personal credit, but a personal loan would. Finally, When you decide to accept a personal loan, the lender will most likely require you to pledge some sort of collateral or guarantee like your vehicle, paycheck(s), home equity, or written promise guaranteeing repayment until the loan is paid in full. Defaulting means your assets and collateral may be seized. Merchant Cash Advances and ACH Bank loans do not require any collateral or personal guarantees to qualify.

When it comes to your business, sometimes it’s best to follow the general rule of keeping business with business and personal with personal. Avoid the headaches of combining the two and ultimately hurting your personal and business credit scores alike.

It’s understandable why you wouldn’t want to go through the hassle of applying for a traditional bank loan, especially when you’re in need of working capital fast! That’s where alternative financing solutions such as the Merchant Cash Advance come into play. Take advantage and keep your personal credit score in tact!

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