Payday loans are short-term business loans that allow consumer borrowers to access quick cash for a flat interest rate. Most of them have a limit of $500 and they can be incredibly pricey for the borrower, according to the Consumer Financial Protection Bureau. Borrowers repay payday loans as soon as they get their paycheck.
Business payday loans don’t technically exist because payday loans are fundamentally consumer-focused funding. That said, merchant cash advances have been compared to the phenomenon of payday loans, granting them the nickname “business payday loans.”
Luckily you can avoid this potentially risky form of funding by accessing more affordable forms of short-term business financing like:
Additionally, specific lenders offer quick, short-term funding that will be less risky than business payday loans:
Should you even consider taking on a business payday loan? And if not, will you be able to access funding from one of these alternatives? We’ll help you answer those questions and more in our guide to business payday loans.
Payday lenders often charge around $15 per $100 lent— a steep price. These fees, attached to the average payday loan amount of $350, and applied to a two-week loan, will render an APR of almost 400%. That makes it some of the most expensive short-term funding on the market—business or otherwise.
It shouldn’t come as a surprise then that it tends to trap cash-strapped consumers in a cycle of expensive debt. That said, payday loans still present tempting, easy money to consumers all over the country. So much so, business owners are also beginning to wonder if there are business payday loans.
As we mentioned, there’s no real business equivalent to payday loans, as payday loans base themselves on a fundamentally and uniquely consumer phenomenon—the consumer paycheck schedule.
Business income tends to roll in on a less rigid basis than the weekly, bi-weekly, or monthly paychecks that consumers live off of. But that doesn’t mean that small businesses can’t be strapped for cash every now and then as they await their customers to pay them for their goods and services.
Many industry experts have taken to referring to merchant cash advances as the business equivalent of payday loans.
Merchant cash advances are a form of funding that allows small businesses to sell their future credit card revenues for a lump sum of capital.
To find the total debt a merchant cash advance would entail, you simply multiply your advance amount by the factor rate attached to your advance. For example, if you’re advanced $100,000 with a factor rate of 1.25, then you’ll owe $125,000 in the end.
You’ll pay back merchant cash advance debt through a daily percentage of your business’s credit card revenues. This daily percentage will be automatically routed to your merchant cash advance provider until your total debt is repaid in full. Quick repayment turnarounds and large factor fees often put the APRs of merchant cash advances up there with those of payday loans, nearing a whopping 400%. As a result of their high cost and sweeping popularity, merchant cash advances have been referred not-so-fondly as “business payday loans.”
If you’re looking for business funding that you can access and repay quickly, then you should look beyond these “business payday loans,” which offer enticingly easy funding but can seriously stifle your business’s day-to-day cash flow and even send you into a spiral of expensive business debt.
A form of small business funding with one of the quickest turnaround times on the market is invoice financing. Through invoice financing, business owners are able to access capital for their accounts receivable. This concept mirrors the structure of a payday loan, but without all of the sky-high APRs.
This is because the outstanding invoices that you borrow against through invoice financing actually act as a form of collateral that secures the financing. As a result of this self-secured nature of invoice financing, the lender will be taking on less risk by providing you with funding. In turn, invoice financing will cost borrowers much less than payday loans do.
Another quick-to-fund, yet less risky alternative to business payday loans is a short-term business line of credit. Business lines of credit work much like business credit cards, without the physical card, plus access to cash funding rather than just credit. Through this form of funding, a lender provides a credit limit from which you’ll withdraw funds as needed.
Once you withdraw funds from a business line of credit, you’ll repay that debt, plus interest, over a predetermined repayment term. But, you won’t pay interest on anything you don’t use from your approved credit line.
Business lines of credit with shorter repayment terms will be remarkably quick-to-fund and easy to qualify for. So, if you’re looking to access quick funding and set yourself up for future access to even quicker funding, then a short-term business line of credit is your best alternative to a business payday loan.
Alternatively, if you don’t have any outstanding invoices to borrow against but you’re looking for one-off access to quick funding then short-term loans will be a solid alternative to business payday loans. Short-term loans work a lot like condensed versions of traditional term loans. Like term loans, short-term loans are lump sums of capital that you pay back, plus interest, over a predetermined repayment term length.
Unlike traditional term loans, though, short-term loans will typically have repayment terms of a year or less. This also means that short-term loans will have smaller loan amounts, more frequent payments, and higher interest rates.
On the other hand, the shorter repayment term means these loans will be easier to qualify for and quicker to fund. So, while short-term loans will be more expensive than traditional term loans, they’ll still be more affordable than most merchant cash advance options. Plus, their quick application and underwriting processes will make them an ideal alternative to business payday loans.
If you’re working with personal credit of at least 580, then you could access credit almost immediately through a business credit card. It might seem counterintuitive to look to a business credit card as a more affordable spending option. But, in many cases, APRs attached to business credit cards will be more affordable than business payday loans. Not to mention, many business credit cards will offer 0% intro APR periods of up to 12 months.
That means that you’ll be able to carry an interest-free balance from month-to-month for a year in some cases. Once that introductory period is up, though, a variable APR will set in.
Keep in mind that you will have to make your monthly minimum payments on time and in full. Otherwise, you might forfeit the remainder of your 0% intro APR period. That said, if you’re in a momentary cash flow gap and looking for some credit to tap into, then a 0% intro APR card could be the most affordable source.
Now that you’re familiar with alternative types of funding to business payday loans, you might be looking for more precise advice in your search. So, let’s check out a few short-term lenders that offer more-affordable, less-risky forms of business funding than “business payday loans.” Note that this list does not include any merchant cash advance providers.
If you’re interested in applying for invoice financing, then we suggest you look to the online lender Fundbox. Fundbox provides invoice financing from $1,000 to $100,000, with repayment terms from three to six months, and weekly discount rates of 0.5% to 0.7% of your original invoice value.
To be eligible for Fundbox invoice financing, you’ll simply need six months in business, to invoice your customers, and use accounting software. For the Fundbox application, you’ll simply need to create an account and sync your accounting software. Through their automated underwriting processes, Fundbox can typically make an instant credit decision and fund you within a day.
If you’re undecided about the type of business funding you want, then BlueVine—who offers both invoice financing and short-term lines of credit—could be a great place to start. Invoice financing through BlueVine can range from $20,000 to $5 million, with repayment terms from one to 13 weeks, and 0.3% to 1.7% charged as a weekly discount. To be eligible for BlueVine invoice financing, you’ll need $100,000 in annual revenue, a 530 personal credit score, and three months in business.
Alternatively, the BlueVine short-term line of credit—a product they call Flex Credit—can range from $5,000 to $250,000. If you draw on the line, you’ll have six months or a year to repay the debt, plus interest that will accumulate at a rate from 4.8% to 51%. For their Flex Credit product, BlueVine will want to see $100,000 in annual revenue, 600+ personal credit score, and six months in business.
And perhaps most importantly, BlueVine is often able to fund applications as quickly as one day. So, if you’re working with less time in business than most lenders require, then BlueVine could be your most accessible alternative to business payday loans.
Finally, if you know that a short-term line of credit is the right move for your business, then we suggest you look into the alternative lender Kabbage. Kabbage lines of credit offer credit limits from $2,000 to $250,000 with repayment terms of six, 12, or 18 months.
Kabbage is an outlier in the short-term funding space not only because of their unique front-loaded interest structure but also because of their monthly repayment schedule—almost all other short-term lenders will require either weekly or daily repayment.
Additionally, Kabbage will be a top alternative to business payday loans because of the accessible funding they offer. To be eligible for a business line of credit of less than $100,000, you’ll simply need revenue of $50,000 a year or $4,200 a month, and a year in business. If you qualify, then Kabbage can fund your business in under a day.
So, now that you’ve made it through our guide to business payday loans, we hope you realize that you don’t have to risk your business’s financial well-being to access quick, easy capital. Merchant cash advances—or business payday loans, as they’re often called these days—are far from the end-all, be-all for easy capital. In fact, all of the alternatives that we’ve highlighted in this guide will likely be able to offer you quicker, more accessible funding for any cash flow hiccups you might experience.