Business payday loans: What they are and how to avoid them

Stay away from these cash advances if cost is your top priority.

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Business payday loans and cash advances go by a few different names, but they all generally offer fast money with few eligibility requirements. But with extremely high costs and often inflexible repayments, they’re best saved as a last resort.

What is a business payday loan?

Technically, there’s no such thing as a business payday loan. A payday loan is an advance you repay plus a fee with your next paycheck. But there are a few types of business financing that work a lot like payday loans.

How do these loans work?

Rather than giving you an advance on your paycheck, this type of financing offers an advance on your revenue or credit card sales. Like with a payday loan, you repay this plus a fixed fee — but with a percentage of your daily sales rather than your paycheck. Some providers require less-flexible fixed daily repayments, regardless of your sales. Loan terms can range anywhere from a few months to a couple of years, and you can sometimes borrow millions of dollars.

How much do they cost?

Fees can run from 10% to 300% of your loan amount. Usually, lenders will advertise this as a factor rate — a number you multiply your loan amount by to get the total fee. In some cases, they advertise costs as cents on the dollar. Factor rates usually run from 1.1 to 3, and cents-on-the-dollar costs usually run from $0.10 to $3.

Using a different formula to calculate your cost makes it easier for lenders to disguise the high cost of the loan. That’s because most lenders express the cost as an annual percentage rate (APR). A loan with a factor rate of 3 over a six-month term would have an APR of 600%.

What types of loans should I look out for?

Loans that work like business payday loans can go by the following names:

Keep in mind that not all working capital and short-term loans work like this.

Why should I stay away from business payday loans?

From inflexible repayments to ridiculously high costs, here are a few reasons to think twice before taking out a business payday loan:

  • Extremely high cost. These loans can come with the equivalent of triple-digit APRs — or even higher — depending on the factor rate and loan term.
  • Daily repayments. This can hurt your cash flow and can be difficult to keep up with, even if it’s based on your daily sales.
  • Potential fixed repayments. Some of these loans come with fixed daily repayments — regardless of your daily sales. This can make it easy to fall behind even if you have only one unexpectedly slow day.

Are there any advantages?

Business payday loans are one of the most expensive types of business financing out there. Like a payday loan, they can be useful as a last resort for the following reasons:

  • Easy to qualify. Merchant cash advances had the highest approval rate out of any type of business loan in 2018, according to a Federal Reserve survey. Some 85% of applicants were approved, compared to 67% of business loan applicants.
  • Easy to apply. You can usually get your funds by filling out a quick online application.
  • Fast turnaround. Depending on the lender, you could get your advance as soon as the next business day.
  • Large amounts available. These providers often offer larger amounts than other online business lenders, with the exception of SBA loans.

3 business payday loan alternatives

While there are some advantages, business payday loans are generally best left as a last resort. Consider these options first:

1. Online business loans

Online business loans check off many of the same benefits as business payday loans, without the drawbacks. They’re typically easier to qualify for than a traditional bank loan, come with a fast turnaround and have applications you can complete in a few minutes.

The upside? You’ll pay interest rather than a fixed fee, and many come with monthly repayments.

7 online business loans that don’t require paperwork

2. CDFI loans

Community development financial institutions (CDFIs) are nonprofit lenders with a mission to fund underserved businesses in the community.

CDFI loans tend to be less expensive than even online business loans and are relatively easy to qualify for compared to a bank loan. However, it can take longer to get your funds than if you borrowed online.

Find a CDFI in your state

3. Invoice factoring

Invoice factoring involves selling your unpaid invoices from other businesses and government agencies to another company at a discount. Typically, it costs around 1% to 3% of your invoice’s value, making it a cheaper option than a business payday loan.

This is usually easier to qualify for than a business loan since factoring companies tend to look at your clients’ credit rather than your business’s credit, revenue and financials.

Compare 3 types of invoice factoring

Compare business loans

Updated March 28th, 2020
Name Product Filter Values Min. Amount Max. Amount Requirements
First Down Funding business loans
$1,000
$300,000
Varies by type of loan
Alternative financing up to $300K with highly competitive rates.
Lendio
$500
$5,000,000
Operate a business in the US or Canada, have a business bank account and have a personal credit score of 675+.
Submit one simple application to potentially get offers from a network of over 75 legit business lenders.
OnDeck
$5,000
$500,000
600+ personal credit score, 1+ years in business, $100,000+ annual revenue
A leading online business lender offering flexible financing at competitive fixed rates.
Kabbage Small Business Line of Credit
$500
$250,000
1+ years in business, $100,000+ annual revenue or $4,200+ monthly revenue over last 3 months
A simple, convenient online application could securely get the funds you need to grow your business.
SmartBiz
$30,000
$5,000,000
650+ personal credit score, US citizen or permanent resident, 2+ years in business, $50,000+ annual revenue, no outstanding tax liens, no bankruptcies or foreclosures in past 3 years
Get funding for your small business with a government-backed loan and extended repayment terms.

Compare up to 4 providers

Bottom line

Business payday loans might be easy to qualify for if you’re in a pinch. But they’re often much more expensive than the alternative, and repayments can be inflexible.

You can learn more about your financing options by reading our article on different types of business loans or checking out our guide to business loans.

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