Business Payday Loans: What You Need to Know

Business payday loans is a nickname of sorts for risky short-term business financing, though it typically refers to merchant cash advances with fast repayment terms and high interest rates.

In the personal lending space, payday loans offer quick access to cash, but you could owe an interest rate as high as 500% to 700% on a loan that generally maxes out at $1,000. Not to mention, these payday loans often require borrowers to provide access to their checking accounts, with repayment due in a lump sum.

A payday loan technically could be used for business expenses, but a merchant cash might be more helpful in this scenario. An advance can quickly overwhelm borrowers, though, so be careful.

Business payday loans: Understand your risk

Business payday loans — in this case merchant cash advances — are a fast option for fixed-price business funding that can be used to:

• Buy inventory
• Cover seasonal expenses
• Supplement daily cash flow

But they can quickly become difficult to repay and disruptive to cash flow. Merchant cash advances aren’t loans. Rather than lending money, merchant cash advance providers purchase a portion of a business’s future receivables, usually credit card transactions, in exchange for a lump sum of capital.

The merchant capital provider takes a fixed percentage of daily sales until the advance is paid back, including a fee. Payments would be deducted from each transaction before the business sees the money. Regardless of whether your daily sales are high or low, the cash advance provider would still get the same cut of each sale.

There are a few other differences between merchant cash advances — which could cost 20% to 40% more than the value of the advance — and traditional business loans:

• No obligation to repay: Loans generally come with a promissory note in the loan agreement that obligates the borrower to fully repay the loan no matter what. Merchant cash advances don’t hold borrowers to the same expectation. As long as you continue operating the business to the best of your ability, you aren’t on the hook to repay the advance if the business closes for reasons outside of your control. This might sound like a good deal, but this freedom comes at a high cost — really high fees.
• High cost. Because the merchant cash advance provider assumes all risk, the cost of funding can be high. Traditional lenders often have the ability to seize assets to recoup losses if the business defaults, making that option less expensive.
• No liens. Traditional loans usually come with liens or personal guarantees to keep borrowers liable for debt. Merchant cash advances aren’t secured in the same way, meaning the issuer takes on all the risk.
• Factor rates. Interest on merchant cash advances is typically expressed in the form of factor rates, which are written as decimal figures rather than percentages. To determine the cost of your advance, you would multiple your advance amount by the factor rate. The total would be the amount you’d need to pay back.

When to consider taking out a merchant cash advance

Though risky, a merchant cash advance could be an attractive option if your business doesn’t qualify for other kinds of business financing and you need money quickly to pay for an unexpected expense.

Like payday loans, merchant cash advances are available almost immediately. Cash advance issuers usually have lenient eligibility requirements as well, so you could quickly receive funds without much underwriting.

Businesses with a large volume of daily credit card transactions may be best suited for a merchant cash advance. If you can afford to forfeit a portion of your daily sales and continue covering your operating expenses, your cash flow may not be at risk.

Alternatives to business payday loans

Here are a few alternative options to consider, including short-term loans and invoice factoring. Depending on the health of your business, you may want to view business payday loans as a last resort for financing.

Short-term loans

Short-term business loans from online lenders typically have quick turnaround times competitive with certain merchant cash advances. Short-term loans typically must be repaid in three to 18 months. Payments may be due on a daily or weekly basis, which is a similar repayment pace to merchant cash advances. These generally require daily payments for a similar three- to 18-month period.

These business loans often come in small to medium amounts — generally between $5,000 and $500,000 — and have higher interest rates than longer-term financing options.  But they generally don’t require collateral and you may be able to qualify with less-than-perfect credit.

Invoice factoring

Invoice factoring allows business owners to leverage outstanding invoices to unlock cash that’s tied up in unpaid bills. A factoring company would buy your unpaid invoices, and advance you a portion of the value, usually 75% to 90%. When your customers pay the invoices, the factoring company would collect a fee — typically between 1% and 5% weekly or monthly  — and send you the remaining amount.

This type of financing shares similarities with merchant cash advances. Invoice factoring isn’t a loan, and you could quickly receive funding, though it may take a few days longer than a merchant cash advance. You don’t need collateral outside of your invoices to qualify. The underwriting process is limited, and you could be approved with bad credit. But the cost of invoice factoring can also be high. It’s comparable to the price of merchant cash advances.

Unsecured business lineS of crediT

Unsecured business lines of credit offer ongoing access to funding for business owners who prefer not to offer business assets as collateral. They’re generally available between $10,000 and $100,000. You would be able to draw from your credit line as needed, only paying interest on what you borrow.

Nontraditional business lenders typically have less stringent requirements than banks, and would likely provide fast access to funding. Also, unsecured lines of credit generally come with higher interest rates than secured lines of credit that are backed with collateral. You may have to pay an ongoing maintenance fee as well to keep the credit line open.

Business credit cards

Business credit cards, like business lines of credit, would allow you to make purchases as needed. Cardholders can also benefit from rewards or perks such as cash back. However, business credit cards typically have higher interest rates than business lines of credit, and you may be subject to fees and penalties associated with the credit card.

It may be easier to get approved for a business credit card than other types of business financing, but the size of your credit limit would depend on several factors, such as business sales and your personal credit history. However, a small credit limit of $500 to $1,000 may be enough to cover your needs.

Microloans

Microloans are available in small amounts to cover a range of generic business expenses, typically with manageable rates and fees. You could apply for a microloan from a national microloan program designed to aid underserved businesses, such as the Small Business Administration microloan program, or from a community development financial institution (CDFI) in your area. CDFIs exist to stimulate economic growth and support small businesses in local communities.

FAQs

What are business payday loans?

Business payday loans are not an existing business financing product. Rather, the nickname is often attached to merchant cash advances, which are fast and expensive funding options on a similar risk level as personal payday loans.

What do I need to apply for a merchant cash advance?

You may need to submit information such as:

• Annual business income and estimated future income
• Bank account statements
• Credit card processing statements
• Credit check authorization
• Information about your business structure

Merchant cash advance applications typically take a few minutes to complete, and you could be approved in one or two business days.

How can I get a loan the next business day?

Many nonbank, online business lenders offer merchant cash advances, short-term loans and invoice factoring, in which borrowers can be approved the same day they apply. Fast funding options tend to come with high interest rates and short repayment terms, so make sure your business can handle the debt before you borrow.

Can I get business financing with bad credit?

Yes, there are bad-credit business loans for which you could apply. Some lenders may approve applicants with credit scores as low as 500. Merchant cash advances are among the options for bad-credit financing, but you may be able to secure a less risky option, like a short-term working capital loan.

Can I get a loan for my startup business?

Startups are considered risky borrowers, and it may be difficult to secure capital without any time in business or without collateral. But you could be approved for certain types of funding with lenient requirements, such as merchant cash advances or business credit cards.