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Are Cash Advance Lenders the right Choice?

Are Cash Advance Lenders the right Choice?

Business and payday cash advance lenders help by providing money to cash strapped borrowers. Get to know more on this in the following WealthHow write-up.
Aparna Iyer
Cash advance lenders help both consumers and business firms tide over the temporary shortfall of cash. Such lenders only advance money to help people overcome the transient cash flow problem. In other words, they are not a permanent solution to lasting financial difficulties.

Business Cash Advance Lenders

Small businesses often face difficulties meeting their working capital requirement. Many times, small business firms, in the start up phase, may encounter working capital issues since their accounts receivable collection period is much longer than the days payable. To ensure that the firm's working capital requirements are met, the business may avail cash advance. A merchant cash advance lender can be approached to obtain as much as USD 500,000 and in as little as 5 to 15 business days.

These advances are beneficial to a small business that finds it difficult to procure a bank loan on account of the lack of creditworthiness, or because of insufficient operating history. The firm is not required to pledge any collateral for procuring the loan since the cash advance is sanctioned in lieu of credit card receivables. Poor credit rating is not a deterrent and there is no need for any personal or third-party guarantee.

It's obvious that a firm's credit card receivables is the single most important factor when it comes to procuring a merchant cash advance, since the lender can get a fair idea about the firm's average monthly income. Typically, a firm is required to process anywhere between USD 1,500 and USD 5,000 in monthly credit card sales. The process of availing these loans is simple. The borrower is required to complete an application form and supply at least 4 months of merchant account statements and provide copies of voided checks. Generally, the applicant is informed about the status of the application within 6 hours of applying for the loan.

The repayment procedure is also pretty simple. The principal and interest payment, on the amount that is lent, is calculated as a percentage of gross sales. Generally, 10% of the daily gross sales go towards funding the amount that has to be repaid in monthly installments. Business owners may be required to switch the credit card processor since the cash advance is automatically repaid as a percentage of each batch's proceeds. Moreover, the loan amount is repaid over a period of 6 to 9 months.

There are a number of advantages of merchant cash advances. The first and foremost advantage is that the business is not required to pledge its assets. This, in turn, ensures that the company dose not end up losing its assets on account of defaulting on payments. The chances of defaulting are also reduced since repayments are calculated on the basis of gross sales. So a reduced monthly gross sales figure would result in reduced monthly principal and interest payments. It goes without saying that if a merchant cash advance lender is paid less principal and interest on a monthly basis, the repayment period will be longer. However, there are no penalties for extending the repayment period.

Business cash advances differ a lot from the traditional bank loans or lines of credit since these have to be repaid regardless of the level of sales. Moreover, a firm that does not have a long operating history will find it difficult to procure unsecured personal loans and lines of credit. A secured personal loan or a personal line of credit results in the borrower facing the risk of losing the asset on account of the inability to repay the borrowed sum. Hence, a small firm can definitely hope to benefit from merchant cash advances provided the entrepreneur bears in mind that these advances come at the cost of high interest rates.

Payday Cash Advance Lenders

Cash advance lenders allow borrowers to obtain a loan in lieu of the next paycheck. Online cash advance (loan) lenders provide loans to people who would like to borrow money without collateral. The credit score of the borrower is irrelevant and the money is advanced on the strength of the borrower's next paycheck. These lenders deposit the amount into the borrower's bank account and electronically withdraw the amount of interest and principal the ensuing payday. Borrowers are expected to sign over electronic access to their bank accounts to receive and repay payday loans. Hence, these lenders are known as direct cash advance lenders.

Direct cash advance lenders fall into 2 categories: those who advance money after verifying various documents and those who provide faxless cash advances.

No fax cash advances are provided without verifying any documents. Hence, these disbursers are referred to as instant or 1-hour cash advance lenders. The borrower is required to complete a small application form and provide his/her checking account information and the lender wires the funds within 24 hours. ACH is an electronic funds transfer system that is governed by the National Automated Clearing House Association. These rules govern interbank clearing of electronic payments for participating depository financial institutions. In fact, lenders have taken the ease of procuring funds to the next level. Recently, a cash advance lender made the headlines by providing cash advances to people who do not have a checking account!

Besides faxless cash advance lenders, there are lenders who check the requisite documentation before providing the loan. The following details need to be faxed over to such lenders.
  • Proof of the borrower being at least 18 years of age
  • Valid proof of identification
  • Proof of being employed in the same company for a period of 3 to 6 months
  • Checking account number of an account that has been active for the past 90 to 180 days
  • Current pay stub or bank account statement as proof of the monthly taxable income being at least USD 1,000
  • Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) needs to be disclosed to the payday loan company
  • Permanent address or address of the place where one is residing
  • The borrower shouldn't have bounced checks in the past.
Considering, that these lenders require the borrower to provide potentially sensitive information like Social Security Number (SSN) and checking account details, people must ensure that they procure an advance from the best cash advance lenders.

The biggest disadvantage of procuring business as well as payday cash advances is that the interest rate is significantly higher than the rate of interest on small business loans and personal loans respectively. Moreover, the cash advance industry is not as heavily regulated as the traditional lending industry. It has been observed that cash advance procurers are twice as likely to file for bankruptcy as compared to people who were turned down by the same lenders. Cash advance lenders can claim the amount that is lent on the due date by presenting a post dated check or by directly withdrawing funds from the bank. Since bounced checks are reported to ChexSystems, it may become difficult for the borrower to open another checking or savings account.