Why Other Lending Options are Challenging

No matter how many successful businesses I’ve opened, banks still treat me like I’m a first-timer, may not even lend to me. I could get a merchant cash advance, but their rates are very high and many are predatory lenders.

Business owners often think of banks as their primary place to get a business loan. Today, there are many options to access debt financing, and each has its own benefits and challenges.


Banks tend to offer the most competitive interest rates, and SBA (Small Business Administration) loans are usually the lowest of all. If finding a low interest rate is your main priority, then bank loans are worth exploring. Note that the SBA itself does not give out the loan, it only guarantees part of your loan for the bank. The bank will still have its own requirements for you to meet before it makes an SBA loan.

While bank financing is attractive based on price, the requirements can also be onerous and the timing can take an extended period.

Banks tend to be highly conservative and focus on reducing risk. This means that they often have stringent collateral and personal guarantee requirements, putting a heavy financial burden on the entrepreneurs. An extensive application process and numerous rounds of review can mean that loans are not granted for a long period.

They also focus heavily on the business’s past performance, which is why startups are seldom approved. Plus, conservative debt/equity ratios also mean that business owners still need to provide a significant portion of their own capital.

Even when a business is approved for a loan, the capital is usually not issued all at once. Funds are often distributed incrementally and only when the business presents invoices to the bank.

Merchant Cash Advance (MCA) and Hard Money Lenders

Merchant cash advance (MCA) or hard money lenders are often appealing because of their speed. Many provide small loans with short repayment periods and require little verification. Funds can sometimes be distributed within a week.

However, the amount of capital provided is often not enough to tackle bigger projects, and they usually charge sky-high interest rates in exchange for that ease of financing.

Interest rates and terms may be presented in different ways to seem reasonable, but when making comparisons, be sure to compare apples to apples. MCAs also typically express their costs as a factor rate instead of an effective APR, which makes it difficult for an average small business owner to understand how much they are paying for this type of financing. Look at the fine print: is it simple or compound interest? What is the amortization schedule? Am I making daily or monthly payments? What is the effective interest rate? Payment requirements can often be burdensome, and it’s important to look at options carefully.

Can NextSeed help?

NextSeed debt financing can replace a portion, if not all, of a senior bank or MCA lender. You still need to meet a certain debt-to-equity ratio, but we are here to solve the financing gap that small businesses face and will work with you to determine the right rates – without making you sign over the shirt on your back.

For more information on bank lending requirements and SBA loans, click here.

For more information on how a factor rate can be compared to APR, and interest rate comparisons among Square, OnDeck, Kabbage and PayPal, click here.