Is An ERC Loan Worth It? ERC Loan Advantages & Disadvantages
ERC loans can be a faster alternative to waiting on the IRS. Learn about the costs and determine if they are a good financial fit.
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WRITTEN & RESEARCHED BY
Lead Staff Writer
Last updated onUpdated
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REVIEWED BY
Finance Director
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On 11/14/23, IRS Commissioner Daniel Werfel announced that the IRS is updating its ERC review procedures and will begin processing new ERC claims in the near future following the moratorium implemented in September. Existing claims are still being processed and eligible businesses can still submit an ERC claim through reputable ERC specialists to be processed when the moratorium ends. Visit our full breakdown of the ERC pause for the latest information.
Does your business need fast access to your ERC refund? If so, an ERC loan might be right for you. But do the pros of getting an ERC loan outweigh the cons? Which businesses benefit from ERC loans? And when are you better off just waiting it out for the IRS to send your ERC refund check instead?
We’ll explain all of the advantages and disadvantages of getting an ERC loan so that you can feel confident about choosing if this funding option is right for you.
Table of Contents
What Is An ERC Loan?
An ERC loan is effectively an advance on your employee retention credit refund. Unlike a traditional business loan, an ERC loan doesn’t need to be repaid monthly. Instead, a taxpayer who has filed for the ERC credit can work with an ERC company to get an ERC “loan,” which means the company will provide you the funds for your ERC credit amount (minus a fee) so you don’t have to wait for the IRS to issue your refund.
This credit amount is usually paid back with one balloon payment once your ERC refund does come in, although some companies may purchase your ERC refund outright.
How To Know If You Qualify For An ERC Loan
Most taxpayers who have claimed the ERC credit are eligible for an ERC loan, although certain factors like ERC credit amount, FICO score, credit report, and even business revenue could be taken into consideration. The best way to see if you qualify for an ERC loan is to work with an ERC loan provider. Read our full post on ERC loan qualifications to learn more.
Should You Get An ERC Loan?
Whether or not you should opt for an ERC loan is going to depend on your business’s situation, how quickly you need access to your ERC refund, and how strong your business profile is for alternative types of business funding.
ERC Loan Pros
The benefits of an ERC loan are:
- Quick Access To Funds: Many ERC loans fund within 2-3 business days, so businesses who need cash quickly to catch up on debt, pay for operating expenses, or have time-sensitive investments could benefit from not having to wait on their refund.
- No More Waiting On The IRS: ERC refunds already had significant wait periods. Now the ERC pause has pushed out processing times and caused significant delays for ERC funding. Businesses that filed before September 14, 2023, have a 180-day processing time, while businesses that filed after that date won’t have their refunds looked at until after December 31, 2023.
- Easier To Qualify For Than Traditional Small Business Lending Avenues: Businesses that don’t meet the borrower requirement for traditional small business loans due to poor credit, small revenue, or short time in business might have difficulty applying for the capital they need to fund their business; whereas, if the same business qualifies for the ERC credit, they may have an easier time getting an ERC loan.
- Usually No Monthly Repayments: ERC loans are most often repaid with one balloon payment when your ERC refund comes in, so you won’t have any monthly payments.
ERC Loan Cons
- ERC Loan Company Fees: When you go for an ERC loan, you will have to pay an ERC loan fee, which is generally 10%-25% of your ERC credit amount. This can be a hefty fee and result in thousands of dollars for some small businesses, depending on the size of your ERC refund. Interest rates may also apply.
- Smaller Portion Of Your ERC Refund Is Usable: Because ERC loan fees can be so high, you’ll have less cash flow than if you had waited to receive your ERC refund from the IRS.
Businesses That Could Benefit From An ERC Loan
- If you need quick access to your ERC credit
- If you don’t qualify for other business lending options
- If you would rather not take out a loan or line of credit for your business funding
- If you don’t care about having to pay related ERC fees
Businesses That Should Find An ERC Loan Alternative Or Wait It Out For The ERC Refund
- If you have a strong borrowing profile, you could get a small business loan, short term loan, or line of credit instead and still have access to your full ERC refund
- If you can afford to wait for your ERC credit
- If you already created a small business budget before learning you qualified for the ERC and can still maintain your business for a couple of months while waiting for the IRS
- If your accountant thinks waiting would be better for your tax situation
Is An ERC Loan A Good Idea? The Bottom Line
Patience is a virtue and can pay off if you need access to your entire ERC credit, but time isn’t a luxury that every business has. If you need cash flow quickly and don’t want to go with (or don’t qualify for) traditional small business loans or lines of credit, then the ERC loan fees could be more than worth the trade-off.
If you choose to go with an ERC loan, make sure to check that the ERC loan company you work with is reputable, and never sign a loan agreement if there are any terms you are uncomfortable with or cloudy on.
Learn how to apply for an ERC loan in our complete guide, and check out our top ERC loan company suggestions.
ERC Loan FAQs
Chelsea Krause
Lead Staff Writer
Chelsea Krause is a writer who specializes in accounting, payroll, and small business loans. She has been with Merchant Maverick helping small business owners manage their finances since 2016. She is a QuickBooks Certified User and former eCommerce store owner. Her accounting expertise has been quoted in Forbes and her work appears in Startup Nation, Small Business Bonfire, and Women on Business. Chelsea graduated summa cum laude with a BA in English & Creative Writing from George Fox University and studied abroad at the University of Oxford as well. She currently resides in Boise, Idaho.
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