By Marc Prosser – November 20, 2013

In our last article we continued our buyers guide series, with a look at the most convenient way of accepting credit cards for your small business. In today’s article we continue that series with a look at which are the the best loan providers for small business. So let’s get started!

Does your business need a loan for 6 months to a year? Up until a few years ago, retail focused small businesses had one main avenue for short-term funding, merchant cash advances.

What is a “traditional” merchant cash advance? A business sells future credit card receipts (revenues) at a big discount to their value in exchange for a lump sum payment. The effective interest rate on a merchant cash advance often exceeds 120%.

Today, there are several much cheaper alternatives to “traditional” merchant cash advances. We reviewed and compared three of the leading companies in the small business funding space: On Deck Capital, Kabbage, and Paypal Working Capital.

Best Short-Term Loan Provider To Small Businesses: OnDeck

They are friendly toward brick and mortar businesses, even ones that banks tend not to lend to. For example, they loan to restaurants, nail salons, and auto-body shops . Other companies mentioned in this article require significant online sales.

  • A loan from on deck capital is Approximately half the cost of a traditional merchant cash advance.
  • To qualify, your company must have 1 year of history, over $100,00 in annual revenues, and be US based.

Best Provider Of Short-Term Loans To Online Businesses: Kabbage

  • Kabbage is Perfect for the 1 or 2 person eBay, Amazon, or Etsy merchant.
  • They are Approximately half the cost of a traditional merchant cash advances.

Cheapest Source Of Funds To Small Businesses: Paypal Working Capital.

This option is by far the cheapest but . . .

The amount of available capital from paypal working capital is tiny and requires your company receive lots of payments via paypal. The maximum amount you can borrow is 8% of your annual paypal collections. If your firm does $15,000 in revenues per month through paypal ($180,000 per year), the maximum amount that you can borrow would be $14,400.

  OnDeck  Kabbage Paypal Working Capital Merchant Cash Advance (generic)
Type Of Business Online & Offline
  1. Online (merchants that collect via paypal or sell through eBay, Amazon, or Etsy)
  2. (merchants that collect via paypal)
  Online & Offline (must receive payments by credit cards)
Value Of Loan / Merchant  Cash Advance $5,000 – $250,000 (Typically, $30K – $35K) $500 -$50,000 $1,000 – $20,000 Maximum 8% of your annual paypal sales. Typically up to 150% of an average month’s credit card receipts
Length Of Loan 3 Month to 18 Months (Typically, 6 months) 6 months 3 to 11 months depending on your payment plan Typically, 6 to 12 months.
Origination Fee / Fee Deducted From Funds 2% (some of its competitors like IOU central charge 4.95%) None None 5 – 10% fee (often called Origination, Risk Assessment, or Professional Service Fee)
Cost Of Funds
(we will explain why we are not using the term interest)
Typically, 15% of the amount borrowed for a six month loan. 8 % –  24% of the amount being borrowed. 3% – 10% of the amount borrowed, the shorter repayment = lower rate 25% – 60% of the amount being borrowed.
Collection Process Deduct fixed amount from bank account on a daily basis. 6 monthly payments with the first two being a greater amount. A fixed percentage from 10% to 30% of funds deposited into your paypal account A fixed percentage of credit card receipts, often in the range of 10% – 25%.
Personal Guarantee Yes. The positive is you build your credit score. No. No. No.

Personal Guarantee: Loans Versus Cash Advances

Of the options described above, On Deck Capital is the only provider of loans. Kabbage and Paypal Working Capital are providing a “new and improved” merchant cash advance. A loan has both benefits and drawbacks compared to merchant cash advances. The main drawback is that OnDeck requires that the borrower personally guarantee the loan. If the business goes under, you are personally on the line to pay it back. If you take a merchant cash advance, generally speaking, you’re not pledging your personal finances to pay it back. The good side of a loan is that paying it back can help improve the credit rating of your business and lead to greater access capital at lower rates.

Cost of Funds Versus Interest Rate

When discussing the costs of short-term loans / funding, we have not talked about interest rates. (With the notable exception of traditional cash advances, where the effective annual interest rate is often above 120%). Instead, we have talked about the amount that the borrower will need to pay back over the time of the loan. In the case of both OnDeck and Kabbage, a typical borrower can expect to pay back the principal (amount borrowed) + 15% of the amount borrowed. Based on these numbers, taking $100,000 will end up costing $115,000.

However, the interest rate is not 15%. In fact, the effective annual interest on these loans is around 60%! There are two main reasons why there is such a large difference between the amount paid back and the effective annual interest rate.

  • The period for repayment in this example is six months, and not a year.
  • The borrower is paying back the principal throughout the term of the loan / merchant cash advance.

In other words, if you average out the amount owed during the life of loan its about half of the original amount taken.

That’s our article for today. If you have any questions or comments please leave them in the comments section below. Also be sure to stay read the next article in this series where we discuss all about when a company has to collect sales taxes for online and offline sales and how to collect and remit sales taxes.

To view this article in full, as a video or to listen to the podcast, click here.

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