There are many options to consider if you want urgent financing to run your business, but you should choose an option that is effective and fast. Online financing is one of the quickest ways that a business can acquire the funding that it needs. However, it is essential to take time learning about the option at hand before you make your decision.
What is Online Financing?
Online financing is a type of business funding that provides advance credit to businesses that operate as a storefront, and in many cases, business that operate completely online. The type of documentation will vary from lender to lender and the type of online financing you’re considering. Generally speaking, most online financing for any small business owner will require that you’re an established business, with an open bank account that shows regular deposits consistent with the nature of your business. Note that online financing is a collective term that represents any funding that considers the credit repayment process in loan repayment. It also uses the creditors’ website to handle most of its processes.
How Merchant Financing is Different from Other Types of Loans
One of the most significant differences between merchant financing and traditional loans is the kind of liberty that it provides in what you do with your advance credit. Most traditional loans obligate the business person to fund specific purposes such as upgrading the facility, buying inventory, and other aspects to grow the business. Any deviation from the initial plan will be considered a breach of contract, risking the loan from being called in by the financier. However, when it comes to merchant funding, there are no restrictions or rules when applying for the advance. This makes it suitable for covering temporary shortfalls in your business.
Apart from providing flexibility in your loan usage, merchant financing is different in other ways, such as:
- Short Turnaround Time
Banks have many requirements to qualify for their loans. This leads to a long turnaround to get the advance. It can go for more than two months, which can be too long for someone who intends to handle an urgent matter. However, an online advance can take less than a day and have the provider underwrite the loan.
- Flexible Repayment Schedules
There are other types of loans that offer flexible repayment schedules other than a monthly basis. Some can consider repayment on a weekly or daily schedule depending on the terms provided by the contract. If you consider a flexible repayment schedule, you should evaluate your cash flow because it can significantly affect your business and your operations as well. Therefore, you should know your repayment to determine whether it can affect the activities of your business.
Types of Online Financing
Merchant financing represents a couple of funding options. However, the common aspect among each option is that there are stiffer fees and interest rates compared to traditional loans. Common types of financing include:
- Merchant Cash Advances
A merchant cash advance is a type of loan provided to a business that has a lesser-than-perfect credit score and which lack the collateral needed to secure a traditional business loan. In most cases, the business owner can pay advances using future receipts acquired through credit processes or online transactions made by clients. The financier usually checks whether the business is worth providing the advance through various data such as the money received through an online payment system. This is different from traditional options that rely on the credit score that a business or its owner has achieved over time. You can apply as much as $2,5000 to $250,000 depending on the assessment made on your business cash flow.
- Credit Card Cash Advances
This is the most popular type of online financing. A business person can borrow the money through the credit card, withdraw the cash through the ATM or any other procedure provided by the credit card company, from the check or cash deposited by the financier. This kind of advance has a higher interest rate that can range up to 24% on the APR (Annual Percentage Rate), which is more than 9% of the average rates. Despite the higher rates, this sort of advance starts accruing immediately, providing a non-grace period, unlike conventional loans.
Some fees apply when acquiring a credit cash advance, which can be a flat or a percentage of the amount that you get in advance. If you use an ATM, some charges apply, charged as the usage fee. Apart from having a separate interest, a credit card cash advance has a separate balance acquired through credit purchases, which you can allow monthly payment from both balances. If you are carrying a minimum interest, the card issuer can consider payment from the balance that has the lowest interest rate. However, you risk accruing higher rates for months as the balance from your cash balance sits for long without usage.
Most credit cash advances do not offer a low or no-interest rate offer for the introduction but provide a quick and easy way to acquire a loan without too much hustle.
- Equipment Financing
You might need specific equipment such as a vehicle, machinery, computers, or tool to run or improve your business. Such equipment might be a significant investment to the point of failing to fund it through your current financial situation. In such a case, an asset financing option can be the best option for your business. A lender will take note of the cost of your new equipment rather than consider the personal credit score that you have achieved. The financing usually lasts throughout the equipment lifetime, but the total repayment amount is much higher than the actual price depending on the interest incurred.
Before you consider equipment financing, you need to check whether the equipment you are about to secure can raise enough revenue that matches the amount required to repay. It should also make a reasonable profit apart from repaying the total amount incurred over its lifetime. Most equipment financing rates range between 8% to 30% and can cover up to 100% of the value of your target equipment.
- Invoice Financing
Most businesses that depend on invoice payment from their customer’s experience cash flow problems if customers fail to pay on time. Businesses that are in such a situation can consider invoice financing to sell unpaid invoices in exchange for cash. The lender can advance up to 85% of the value of the invoices, holding 15% as a reserve. Once they receive payment from the customer, they give back the 15% reserve amount, excluding the fees. The lender will typically consider a 3% processing fee and an additional factor fee of 1% for every week that your customers fail to honor their payments.
Invoice financing is an expensive option when it comes to funding a business. It requires you to pay a certain amount to access a certain amount of money, which can make you lose part of the profit that you intended to make.
Businesses Ideal for Online Financing
Online financing is ideal for small businesses since they do not require a lot of funding compared to big companies. In most cases, their needs are quite small, requiring small advances, which are payable within flexible terms. The financing is ideal for businesses such as:
Restaurants stand to be one of the businesses that can benefit from this sort of funding since they experience equipment failure on most occasions. Therefore, there is a need for immediate funding to purchase the equipment to ensure that normal processes continue. In such a case, online financing is the best option since it does not take long to access.
- Medical services
The medical industry is another industry that benefits significantly on merchant loans. There are many machines needed in this industry, which are not affordable through a regular financial situation. For that reason, merchant financing provides a flexible funding option that can cover all the expenses incurred with much flexibility.
Retail shops represent the largest percentage of businesses that depend on online financing as their funding option. Every storefront experience times when the sales are either up or down. The fluctuation might be a result of the holidays or the time of the month. Retail business can benefit from merchant financing since it allows flexible payment according to the amount that a business makes out of its sales or payments made by clients.
How Online Financing Works
Your financier will set up a system that intercepts your money through the payment system that you use, such as the credit system. They will take a certain percentage of the amount depending on the transactions that you make to pay off their money plus the interest and other fees that apply. This means that they repay a big chunk of your money during a good business and do not repay themselves when there is zero transaction made.
You might be wondering how lenders repay themselves, and there is no set length of time that they consider. Well, they use a factor rate procedure that indicates the overall repayment amount. So, if you secure a funding of $1,000 with a factor rate of 1.15, it means that you have to multiply 1000 with 1.15 to determine the amount that you will pay in the end. This offers a straightforward way to determine how much you will spend in the end, helping you to decide whether it is a safe option based on your financial capacity.
A borrower can qualify for about $2,500 to $250,000 depending on the needs at hand. Lenders can go past this limit, but that means that you will be incurring higher interest rates. In that case, it is advisable to consider a long-term advance, which provides lower interest rates and long repayment periods for substantial advances.
- Financing Rates
As mentioned earlier, online financing comes along with a factor rate since there is no fixed repayment period. Most factor rates range between 1.14 to 1.18, although most financiers provide their factor rates according to the amount that a borrower decides to get. Compared to rates offered by most traditional loans, most online financing options have a higher APR. The rates are high to the point of tripling the rates provided by normal loans. This makes it unsuitable for large loan requests.
What You Should Have to Get Online Financing
Any business that expects to acquire a merchant advance should meet specific standards and requirements to receive the funding. Owners should provide necessary documents to support their qualifications to be in a position of acquiring the financing. Typically, a business requires to meet qualifications such as:
- At least a year in business
- Driver’s license
- A valid business certificate
- A personal credit score that is not less than 500
- Not less than $ 50,000 in revenue raised annually
- Valid clearance showing tax compliance and returns
- An operational credit card processing system
You should note that every lender has different demands, although most of them consider these requirements. Also, you might find some online funding options, excluding some of the specifications provided above and considering other options altogether.
Precautions for an Online Financing Process
Online financing can be a reasonable loan option for a business person who has an emergency and has limited resources. However, one should have a clear and reasonable way to repay the amount within the stipulated timeline. Moreover, there are a few precautions to consider to get the best out of the loan and avoid future problems. Some of the things to avoid are as follows:
- Considering an advance before you become bankrupt
Creditors are cautious with borrowers who are about to claim bankruptcy before they finance them. Failure to do so, they might find themselves losing their credit if the card issuer considers their loan as part of the exclusion when one claims to be bankrupt. Therefore, borrowers usually examine the kind of debts that you have, their dates, and determine whether there are high possibilities of filing bankruptcy. If they find such possibilities, they will disregard your advance application, considering the credit card as fraudulent.
- Acquiring the loan to pay your bills
Using a cash advance to pay for your debt risks the possibility of falling into a debt cycle. You risk having higher interest charges in addition to the daily credit card processing interest that you are subject to.
- Buying something that you can't afford
This phenomenon is common to businesses that intend to acquire equipment financing. Well, at some point, you might feel satisfied with your purchase, but there are imminent financial issues that might come along with such choices. If you plan to buy equipment for your business, make sure that it is worth buying, and its usage can meet the amount that you will incur.
Find an Online Financing Company Near Me
It is much easier to make a reasonable decision about your online financing based on the information we have laid out for you. If you are Los Angeles, we at the Wide Merchant Group are ready to provide financial support for your business. Contact us today at 800-630-4214 to get the assistance you need.