A comparison: Payday Loans and Invoice Financing
“Get cash!” We all know the advertising and phrases used by payday lenders to entice desperate people. For some, payday loans may be a loan consolidation company realistic alternative, but for most, the temporary comfort they bring comes at a great cost.
Here are the facts concerning small business payday loans (also known as cash advance loans) and some alternatives to explore.
A Payday Loan
Payday loans began as a fast fix for monetary troubles. Payday loans are simply cash advances secured by a personal check or paid electronically (hence the name). The funds are made accessible for a limited time (often two weeks) at a fixed cost depending on the amount borrowed.
Businesses promote payday loans or cash advance loans as a solution to cover financial shortages caused by unexpected expenses or inadequate incoming income.
Payday loans function as follows, according to the FTC:
“The borrower makes a personal check payable to the lender for the amount requested plus the borrowing charge. The firm agrees to keep the check until the loan is due, generally the following paycheck. Or, with the borrower’s approval, the corporation electronically deposits the borrowed funds (minus the cost). The loan is due the next payday.”
Payday Loans Have a Cap
To safeguard borrowers, most states have rules limiting the amount and length of payday loans. Others have outright prohibited them. Limits vary from $300 to $500.
Cash Advances Are Expensive
Payday loans may be highly expensive, particularly if you can’t pay them back on time. Payday loan yearly percentage rates range from 400% to 5,000%!
Payday loans may, in the long term, exacerbate financial problems. Every year, according to sources, more than half of payday borrowers take out seven or more loans. The majority are confiscated within 14 days after repayment, with some being seized the same day.
The FTC warns against payday loans and advises customers to investigate alternatives. The Commission offers instances of rising charges and how a $100 loan may cost $60 after three rollovers.
Payday Loans Cause Long Term Debt
This indicates that one-quarter of all borrowers owe payday lenders 88 percent of the year. The CFPB analysis and the cost of payday loans are broken down by Consumerist.com.
Payday Loan Ads Banned By Google
In July, Google caved to consumer pressure and banned payday lenders from utilizing Google Ads (the ads that appear above search results).
“We will be changing our rules internationally to reflect that these loans might result in unsustainable payments and significant default rates for consumers. This move protects our consumers from dangerous financial products…” Director of Global Product Policy, David Graff, blogged.
Facebook banned them in 2015.
WHY INVOICE FINANCE IS BETTER FOR BUSINESS
Payday loans might be handy if you know you can pay them back quickly. With irregular cash flow and unanticipated costs, they might deepen long-term debt.
Making a realistic budget, forecasting cash flow, and learning from your cash flow statement are all preventive actions that company owners may do. But there are cheaper and more sustainable funding options.
Invoice financing is one alternative gaining popularity. Unlike invoice factoring, invoice financing allows you immediate access to cash by advancing outstanding invoices.
The advances assist you manage your cash flow while you wait for accounts receivable bills to be paid. This boost in cash flow is meant to help firms keep up with costs like new equipment or wages.
ConsolidationNow, for example, advances 100% of your due invoice amount. You have 12 weeks to repay the loan plus a minor charge (if you repay early, the remainder of the fee is waived). There is no limit to how many invoices you may advance as long as you stay under your ConsolidationNow Credit limit.
Invoice finance is a good alternative to dangerous and expensive payday loans since it provides same-day cash, keeps costs low, and allows you to access money due to you.