There are a range of types of loans which businesses of all types can use in order to grow and invest in their ventures. These range from secured loan options such as mezzanine finance and logbook loans to unsecured business loans. All of these loan types have potential advantages and pitfalls and used correctly can be the difference between a business stagnating and its progression and growth.
Retail businesses and those with a large volume of credit and debit card transactions may seek merchant loans, a popular option for qualifying businesses. For these businesses, there is also the option of emerging alternatives to merchant loans which can be more flexible.
One of the major advantages of specific and bespoke business loans is that they take into account the specific challenges of running a business. It is important however that before applying you understand the merits of each type of loan being considered and that the loan that is best-suited to the specific business is the one chosen and applied for.
Mezzanine Finance
Mezzanine finance is an offshoot of bridging and development finance as well as a traditional business equity arrangement. This type of finance is typically used in cases where there is a large element of risk involved with the business seeking the necessary funding. Whereas development, bridging and auction finance arrangements are fully secured on a property or properties, this is not entirely the case with mezzanine finance.
This finance is applicable to businesses with increased risk yet the possibility of very lucrative return.
Whilst for this type of loan the borrower must have equity in a property to use as security, they must also have a substantial amount of equity on the business requiring the funding. For mezzanine finance, whilst the loan is secured against a property (often as a second charge loan), there is a clause in the agreement that if the borrower does not repay the predetermined amount by a certain time, the lender then receives a percentage share of the business’ equity.
Then, should they wish the lender can either sell their shares for a profit to make up their losses or they may keep them and receive the relevant percentage share in the business’ profits (as equity).
Merchant Loans
Merchant loans are tailored to the needs and nature of retail businesses and shop-type businesses. In order to qualify for a merchant loan, the business must accept credit and debit card payments. They must also be able to show a significant amount of turnover passing through their card terminals on a regular basis.
The way these loans work is that the lender provides the funds to the borrowing business plus interest. Unlike other types of loans where the borrower needs to pay predetermined amounts towards the loan and its interest each month, with merchant loans, repayment amounts are deducted by the lender automatically.
This is done by the lender changing the credit card payment provider of the borrower and then taking a percentage of the revenue passing through the card terminals each month. Any revenue left after the payment is taken then goes to the business. Over time this pays off the loan and the interest. However, an issue with these loans is that many businesses cannot fully predict their cashflow and cannot guarantee that one month will see as much revenue as the last.
Therefore, an underlying problem with these loans is that should the borrower not be able to repay the monthly repayment they may get hit with additional interest and late payment charges causing their loan to snowball.
Merchant Cash Advance Alternatives
These loans have emerged as a result of some of the restrictions placed on certain types of businesses; namely those that don’t or who can’t accept credit and debit card payments. Traditionally, these types of usually smaller businesses would not be able to get merchant-type loans.
Often these businesses would either have to make do without the necessary loan or they would have to seek out expensive alternatives such as payday loans or short term unsecured loans which would burden them with high interest rates.
However, these alternative loans, commonly referred to as ‘merchant cash alternatives’ allow the borrowing business to borrow the funds they need and repay them on the same kind of terms as a merchant loan in the format of a fixed credit arrangement. This works by a predetermined amount being borrowed over an agreed timeframe over which the borrower makes their repayments.
The difference though, is that rather than the repayments coming directly from the borrower’s credit card terminals and revenue, they can choose how and to an extent when they repay the loan. Many of these lenders allow for the loan to be repaid early and because the loan and the additional interest and charges are fixed from the start of the loan, as long as the borrower informs the lender of any changes in business, circumstances or cashflow, they will rarely be burdened with extra fees. Furthermore, these loans can be repaid early meaning that the borrower can clear their debts as promptly and effectively as possible.
