Merchant cash advance or payday loan: what’s the difference, and which should I use?

Sooner or later, everyone gets slammed by a disaster. Your car dies with the rent due. A busted water pipe floods your office and store. Your work computer goes up in smoke. No one knows when it’s coming, but everyone needs quick money for the fix.

There’s cash for solutions, there’s money for opportunities. A small business that needs more cash to solve their problems is a small business that won’t be able to grab the chances that arise. A half-week ad campaign that could double your revenue. Getting a second van for your sales team.

Setbacks will keep coming, whether you’re rich or barely scraping by. If you have bad credit or a thin wallet, you might think that getting the cash for a big expense is hopeless.

It’s tough, no doubt; but plenty of people have been on that side of the table and found solutions, and so can you. Don’t panic: although poor credit and an empty bank account are a poor start, a cash advance or payday loan could still give you the money you need.

Cash advances and payday loans are some of the most popular and accessible short-term lending options. Anyone with bad credit that needs quick money could make the choice between the two.

Just remember that this is a big financial move with an impact on your life. Take your time and make a smart call. But take a minute to know what you’re jumping into.

Although the terms are sometimes used interchangeably, there are major differences between cash advance and payday loans. You need to understand the details to make the right call. There are advantages that can put you ahead and downsides that can hurt.

Understand exactly what you’re going to spend the cash for. There are cash advance and payday loan options suited to your situation, and there’s reason to pick one or the other.

If you need cash to repair business losses or make a marketing push, a cash advance might be right for you. Merchant and business cash advances are meant for business owners that need a cash injection for some aspect of their company. Each cash advance you can use for different, specific reasons: renovating your office space, grabbing advertising opportunities, adding staff.

Even a business owner can have personal needs. If you’re suffering from a personal loss or an expense outside of your business, then you could choose a payday loan. For instance, your tire blows on the highway, or your computer at home goes up in smoke and you need it fixed today.

Cash Advance and Payday Loan Requirements

Since both cash advance and payday lenders lend money to people with bad credit and little time to spare, they also take as little time as possible to qualify borrowers. But it’s worth knowing that there are differences between cash advance and payday loan requirements.

Cash advance lenders vary in what they ask for. You might be asked to provide bank statements, credit scores, and so forth. Remember that cash advance options exist for both merchant credit accounts and bank accounts. If your business needs a cash injection and you’re paid mostly through credit cards, then you can take out a merchant cash advance; if you’re paid by check, look into a business cash advance.

In general, payday loan companies will ask you to show ID, proof of income, and a job. Then you write them a post-dated check for the loan plus the fee, dated your next payday.

Figure out how much money you need to get over the hurdle. Cash advance and payday loan options vary wildly by how much they let you borrow.

Your monthly revenue decides the size of the advance. A merchant cash advance can get you anywhere from 50% to 80% of one month’s revenue. This money comes in as a lump sum. A cash advance lender usually cares most about the strength of your business.

There are many regulations that cover payday loans, including restrictions on the amount you can borrow. Some states ban payday loans or put them under heavy regulations. Most payday lenders will lend you about $100 to $1,000. If you can get a payday loan, the amount depends on the lender. Their most common qualification process asks for proof of a job and a checking account. Depending on the lender, you might be asked to provide repayment history.

Repayment Processes

Cash advance and payday loans differ strongly in their repayment processes, and it’s critical to know how you’ll pay back the lender.

Merchant cash advances work like this: you sell a share of your credit card sales for a lump sum of cash. For every card sale you make, your card processor splits it up with your lender. The size of the slice varies by your lender. Say you sell a product for $500, and the lender gets a 10% cut. When that sale goes through, the processor gives you $450 and your lender gets $50. A business cash advance functions much the same way as a merchant cash advance, only with bank account deposits instead of credit card sales. Your lender makes automatic withdrawals from your bank account until they’ve been paid in full. The lender and you will agree on a daily or weekly payment. These terms are set beforehand. Lenders differ on how to collect repayment.

Payday loans come due on your next payday, generally about two weeks later. There are fees of about $15 to $30 per $100 borrowed. When that day comes around, the lender deposits your check and the loan is repaid. If you can’t pay it back, you can “roll over” or renew the loan for two more weeks; but lenders add another fee and more interest. Avoid rolling over loans.

What Interest Rates and Fees You’re Paying

You should know what interest rates and fees you’re paying for your money. There’s always a cost to borrowing money. Sometimes you have to know how much damage a loan is going to do. Short-term loans can turn into huge obligations.

Cash advances aren’t legally loans, and so don’t charge traditional interest. You’re not repaying the principal plus interest; you’re repaying the advance plus a set percentage. Unlike traditional interest, this percentage is fixed, and you pay the same no matter how long repayment takes.

A payday loan might seem too expensive for what it is. You could be right: the APR on a two-week payday loan is around 400%.

If you’re really serious about a cash advance or payday loan, that means deciding whether it’s worth it. A cash advance or payday loan needs you to plan for your expenses. Read the fine print and go in with a solid repayment plan. Now that you know the details, you can make a call.