With all of the different types of business loans available, it’s difficult to sort through all the chatter to find the one loan that’s right for you. One type of loan that’s on the rise among small business owners is the cash-advance loan, often seen as a payday loan or payroll advance.&nb
With all of the different types of business loans available, it’s difficult to sort through all the chatter to find the one loan that’s right for you. One type of loan that’s on the rise among small business owners is the cash-advance loan, often seen as a payday loan or payroll advance. This high interest form of loan sharking can put you and your business at risk for financial ruin.
After a series of new laws that went into effect in 2010, payday lenders were faced with new rules that effectively reduced or closed their predatory ways in some 22 states, however, in the last 12 months a growing interest by some of the nation’s largest banks like Wells Fargo and Regions banks have put a more ‘socially acceptable’ spin on the age-old game of loan sharking. A tiger simply cannot change its stripes. The national lenders are stepping into the short-term payday lending game with annual interest rates nearing 300 percent (yes, 3-0-0). With the use of automatic deposit and withdrawal, the loans are being deposited into client’s accounts and then at the designated date, the banks withdraw the funds plus interest and fees, regardless of whether the borrower actually has the money available in his or her account. The borrower, not able to make such a sizable repayment, must then scramble to bring the account back to a positive balance, thereby digging further and further into the debt cycle.
What are the short term borrowing options available for small businesses?
- Payday loans / cash advance – These short term loans are usually secured by a personal check (access to a personal or business checking account). The lender will provide the borrower with immediate cash in amounts as little as $100 and often as high as $10,000 for a short-term time period of 20, 30 or 45 days. Interest on the loan is often compounded daily and includes significant fees. If the repayment deadline passes without repayment, the borrower can sometimes extend the loan for an additional fee and interest charges.
- Merchant Cash Advance / Business Cash Advance – Completely different from payday loans and cash advances, a merchant cash advance is an alternative financing program for businesses having difficulty securing more traditional bank loans. The short term loan is secured on a business’ future credit card sales and doesn’t require perfect credit. The lender will establish a connection with the borrowing company’s credit card processing institution and then electronically receive a portion of each credit card sale toward the borrowed amount until it is paid in full. The terms and interest rates are set in advance of the loan receipt. The loans can range anywhere from several thousand all the way up to $500,000 or more. Typically the loans plus the interest are usually paid back in a few months to two years depending on how the arrangement is structured.
Borrowing Alternatives to Consider:
- Seek community-based assistance through credit unions and micro lenders
- Take a cash advance from a credit card – while still not the most recommended source for business funding, the credit card cash advance offers a significantly lower interest rate for quick cash, at its highest around 30 percent interest which won’t compound daily.
- Talk with your vendors about extending your lines of credit or payment terms.
If your small business is facing cash flow difficulties, there are often many options available to help ease the pressure and create additional cash flow. Working with an experienced accountant or tax professional can not only improve your bookkeeping, but bring to light new alternatives that alone, you may never have discovered.
PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.
To find a trusted accountant in your area, visit www.SmallBizAccountants.com.
Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.
Copyright Information 2011 Professional Association of Small Business Accountants