Business Payday Loans: What You Need to Know

A business payday loan is a form of quick, short-term financing used to help cover a company’s urgent or unexpected expenses. Typically referred to as merchant cash advances (MCAs), this type of small business financing usually has higher rates and fees than traditional banks and lenders. But there are other funding options available to businesses who need funds quickly.

What is a business payday loan?

Business payday loans technically aren’t business loans. Instead, they’re merchant cash advances (MCAs), allowing you to receive an upfront cash advance based on your estimated future earnings. The MCA lender then withdraws a set percentage, or holdback rate, from your daily or weekly credit and debit card sales until the debt is repaid. The holdback rate typically ranges from 5% to 20%, depending on the lender.

You can use business payday loans for a range of purposes, such as purchasing inventory and equipment, covering seasonal expenses, hiring staff or supplementing your company’s daily cash flow.

Businesses typically don’t need good credit or collateral to get a merchant cash advance. While these lenient requirements can help companies in a pinch, business cash advances can be a very costly way to get funds for your business.

Depending on your company’s qualifications, you can consider alternative funding options to get money fast. For example, if your credit score is 500 or higher and your company has operated for at least six months with a minimum $30,000 in annual revenue, you might be able to qualify for a term loan, line of credit or microloan.

The risks of using MCAs as payday loans

Similar to personal payday loans, business cash advances are often considered risky due to their high interest rates and fees. Payday lenders market these products to bad-credit borrowers or those who might struggle to qualify for other types of traditional business financing.

Here are some reasons why small payday loans tend to cost more than traditional loans:

No obligation to repay

Loans generally come with a promissory note in the business loan agreement that obligates the borrower to repay the debt. 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: exorbitant fees

High cost

Because the merchant cash advance provider assumes all risk, the cost of funding can run high. Traditional lenders often have the ability to seize assets to recoup losses if the business defaults, making secured business loans a less expensive option.

Factor rates

Business loan interest rates on merchant cash advances are typically expressed as factor rates, written as decimal figures rather than annual percentage rates (APRs). MCA lenders typically have factor rates between 1.1 to 1.5 or higher. Converting factor rates to APRs can help you compare MCAs to other financial products.

For example, a $30,000 advance at a 1.1 factor rate with a 180-day term would equal a 37.91% APR. If you have a 1.5 factor rate for this same scenario, your advance would have a 172.38% APR. In comparison, other finance options start as low as 3%.

When to consider short-term payday loans

Though risky, a merchant cash advance can be an attractive option if you need money in an emergency, especially if your business doesn’t qualify for other types of business financing.

If you need a business loan fast, MCA lenders usually have lenient eligibility requirements, allowing them to provide same-day business financing.

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

Requirements for merchant cash advances

While business loan requirements will vary based on the lender, you can expect to provide the following documents when applying for a merchant cash advance:

• Recent business tax returns
• Financial statements
• Recent credit card processing statements
• Employer Identification Number (EIN)
• Business history
• Business credit report
• Personal credit report

Alternatives to get money quickly

Depending on your company’s financial wellbeing, you may want to view business payday loans as a last resort for financing. Here are a few alternative options to help your business access the capital it needs.

Short-term online business loans

• Time to funding: Same day to three business days
• Minimum credit score: 500
• Average interest rates: 3% to 60.9%

Short-term business loans from online lenders typically have quick turnaround times competitive with certain merchant cash advances. Repayment terms usually range from three to 24 months, with payments required on a daily, weekly or monthly basis.

These business loans can offer between $2,000 and $1.5 million, typically with lower rates than MCAs but higher rates than longer-term financing options. Some term loans don’t require collateral and you may be able to qualify with less-than-perfect credit.

Business lines of credit

• Time to funding: One to 14 business days
• Minimum credit score: 600
• Average interest rates: 3% to 39.90%

Business lines of credit can provide between $1,000 and $250,000 in revolving funds, allowing you to withdraw what you need whenever you need it. You typically only pay interest on withdrawn amounts, although some lenders charge maintenance fees to keep the credit line open.

Alternative lenders typically have less stringent requirements than traditional banks, often approving and funding your requests within one to three business days. Unsecured lines of credit generally come with higher interest rates than secured lines of credit that are backed with collateral. However, lines of credit are typically more cost-effective than business payday loans.

Microloans

• Time to funding: 14 days to three months
• Minimum credit score: 300
• Starting interest rate: 0% to 35.99%

Microloans are available in small amounts up to $50,000, helping you cover a range of business expenses 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 (SBA) 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.

Business credit cards

• Time to funding: Seven to 14 days
• Minimum credit score: 300
• Starting interest rate: 13.24% to 35.99% (or 0% with an intro APR offer)

Business credit cards, like business lines of credit, allow you to make purchases as needed. Cardholders can also enjoy perks such as cash back or travel rewards. 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 immediate needs.

Invoice factoring

• Time to funding: Same day to 48 hours
• Minimum credit score: Typically not required
• Starting factor fee (discount rate): 0.55% to 8.25%

Invoice factoring is another option if you want a quick business loan. Once approved, a factoring company will give you an advance based on your company’s unpaid invoices, usually 75% to 90%. The factoring company then collects payments on your behalf, keeping a fee for its service before sending you the remaining amount.

However, invoice factoring, like merchant cash advances, is not a loan. These lenders aren’t as tightly regulated as traditional lenders and banks, leading toward more predatory behavior and practices. Because of this, it’s worth considering invoice factoring as a last resort.