Ecommerce is booming, and each day new startups are establishing their online stores. This means that the online business industry is becoming more competitive than ever. If you run an online business, you may have to take drastic measures to ensure that you are not left out of the race. You may have to increase your marketing efforts or introduce new products in your online store. For that, you’ll need cash.
The cash requirements could be high and you may have to take a loan to meet those requirements. You could take a business loan from a bank or try alternative funding options like a merchant cash advance. Let’s take a look at which option is better for your business.
Business Loan from a Bank
The interest rate on a business loan from a bank is low. However, these loans have stringent qualification requirements. In order to get a business loan from a bank, not only must you be able to document a successful business plan, but you must have a good personal credit score as well. If your credit score or profit statements are shaky, many banks will not give you a business loan.
Banks also require borrowers to provide collateral for a business loan. That collateral may not only include your business assets, but your personal assets too, such as your house or car. If you default on the loan, you are at risk of losing your home or vehicle in addition to your business assets.
Many banks don’t process business loan applications for online businesses. The reason is that the risk associated with online businesses is high. Even if approved, the amount you are able to borrow may be lower than what your business requires.
Alternate Funding Options
When the owner of an online business can’t get a bank loan, they must search for alternate funding options like unsecured fast business loans. There are several alternative options available for online businesses and one of them is a merchant cash advance.
Merchant cash advances allow borrowers to get money for their immediate needs so that their business can compensate for temporary cash flow shortfalls, expand into new areas, increase marketing, acquire inventory, and more. With a merchant cash advance, you can get money against your future credit card payments. In return for an immediate cash advance, the lender takes a specific percentage from every credit card payment made to your business until the loan is repaid.
Lenders of merchant cash advances place a lower emphasis on your credit score, and they do not require collateral. They are only interested in your business’s credit card sales. Since payments towards online businesses are mostly made through credit cards anyway, owners of online businesses have an advantage when it comes to qualifying for a merchant cash advance.
The main downside of a merchant cash advance is that the interest rates tend to be high. Moreover, as payments are deducted, your will experience a drop is immediate cash flow which may cut heavily into your profits, or even push you into the red during the repayment period. Because of that, merchant cash advances are generally only the best solution for your business when you can’t qualify for a traditional business loan from a bank, or when you can’t wait the weeks that it might take for a bank approval to go through.