Fast financing can strain small business finances

The landscape of small business finance has shifted, with tech vendors and payment processors offering rapid funding decisions and next-day deposits. While this increases options, Marianne Markowitz, President and CEO of First Women's Bank, warns that speed can come at the cost of long-term financial strain.

Fast financing methods, such as merchant cash advances (MCAs), provide cash in exchange for a percentage of future sales. These can be useful for bridging short-term cash flow gaps. Traditional banks, however, underwrite for long-term sustainability, a slower process that often yields better terms. Federal Reserve data from 2019 shows large banks approve about 58% of small business loan applications, while smaller banks and online lenders approve higher rates, but with increased costs.

The speed and automation of alternative lenders contrast sharply with the relationship-based banking offered by traditional institutions. While fintech platforms focus on transactions, banks build strategic partnerships that extend beyond initial funding. Banks can offer advice and flexibility during unexpected market shifts or cash flow issues, unlike automated systems.

Products like MCAs require careful financial management, especially for businesses with uneven cash flow or thin operating margins. Automated, often daily, withdrawals from revenue streams can complicate the timing of payroll or other operational expenses. If a business relies on continuous advances to sustain operations, it can quickly deplete working capital. Before utilizing fast financing, business owners must thoroughly evaluate costs, terms, and their impact on long-term financial health.

Successful use of alternative financing requires careful planning and consultation with banking partners and advisors. For women entrepreneurs in particular, strategic capital acquisition is not just about solving current needs but building a resilient financial foundation supported by knowledgeable advocates.