Business Loans & Merchant Cash Advance[yoast-breadcrumb]
Business Loans & Merchant Cash Advance: A Helpful Guide for Small Businesses
Getting funding for your small business can be tricky. Traditional bank loans often require strong credit, years in business, and valuable collateral – things many small or new businesses don’t have. That’s where alternative lending options like merchant cash advances come in.This article will explain what business loans and merchant cash advances are, how they work, and when each option might make sense for your company. We’ll also look at pros, cons, costs, and eligibility requirements so you can make an informed decision on business financing.
What is a Business Loan?
A business loan is a type of financing where a lender like a bank provides a lump sum of money that is repaid over time with interest. The loan has set repayment terms like 60 months, as well as a fixed interest rate.Banks want to ensure loans are repaid, so they look at factors like your business’s financials, time in business, credit score, and collateral when deciding whether to approve a loan.
How Do Business Loans Work?
When you get approved for a business loan from a bank, you receive the full loan amount upfront as a lump sum. Then you make fixed monthly payments over the loan term until it is fully repaid with interest.For example, if you get a $50,000 loan over 5 years at 10% interest, your monthly payment would be around $1,110. In total, you’d repay nearly $66,600 including interest.Business loans can be secured or unsecured:
- Secured loans require collateral like equipment, real estate, or investments to secure the loan. If you default, the lender can seize the collateral.
- Unsecured loans don’t require collateral, but they often have higher interest rates and stricter eligibility requirements as a result.
Pros & Cons of Business Loans
- Fixed monthly payments are predictable
- Can build business credit with on-time payments
- Potentially lower interest rates than alternative lending
- Longer repayment terms spread costs over time
- Strict eligibility requirements like good credit
- Collateral often required for larger loans
- Approval process can take weeks or months
- Early repayment penalties may apply
What is a Merchant Cash Advance?
A merchant cash advance (MCA) provides quick financing by purchasing a portion of your future credit card sales. The lender provides a lump sum upfront, which you repay by allowing them to take a fixed percentage of your daily credit card revenue until the balance is repaid.MCAs are easy to qualify for but more expensive than loans. Lenders look at your credit card sales rather than credit scores to approve funding quickly.
How Do Merchant Cash Advances Work?
With an MCA, you get a lump sum payment upfront and agree to repay the lender a fixed percentage of your daily credit card sales until the balance is repaid – often within 6-12 months.For example, you might get a $20,000 MCA with 15% taken from daily sales until you repay $28,000 total. If you have $2,000 in daily credit card sales, $300 would go to repaying the MCA. In about 4 months, the $28,000 would be repaid.The repayment percentage remains fixed even if sales dip, so MCAs can strain cash flow. But early repayment is allowed without penalty.
Pros & Cons of Merchant Cash Advances
- Fast approval and funding in days
- No collateral required
- Repayment rises and falls with sales
- No early repayment penalties
- Very high interest rates
- Can strain cash flow with fixed repayments
- Doesn’t help build business credit
- Not regulated like loans
Cost Comparison of Business Loans vs. MCAs
The biggest difference between loans and MCAs is the cost. Loans have fixed interest rates usually under 30%, while MCAs have rates ranging from 60% up to 300%.Here’s an example cost comparison:
|Loan Amount||Interest Rate||Term||Total Repaid|
As you can see, the MCA has a much higher interest rate and shorter term, leading to higher overall repayment costs despite the same loan amount.
Because MCAs focus on credit card sales rather than credit scores, they have less stringent eligibility requirements than traditional loans. Here are some common requirements:Business loans:
- 650+ credit score
- 2+ years in business
- Revenue over $100k/year
- Collateral often required
Merchant cash advances:
- 3-6 months in business
- $5k-$10k/month credit card sales
- No collateral required
- Personal credit scores often not considered
So businesses that are very new or have bad credit can often qualify for an MCA but not a loan. Loans have much more rigorous requirements.
How to Get Funding
The best place to start is your current bank – they already have a relationship with your business. Smaller community banks are often more flexible than big banks.You can also apply with online lenders like Kabbage, OnDeck, and Fundbox who offer quick loan decisions. But interest rates may be higher.
Merchant Cash Advances
Since MCAs aren’t offered by traditional banks, specialized finance companies like Yellowstone Capital and Advance Business Capital are good options.You can apply online quickly and get approved in 1-3 days based on your credit card sales history. The application process is simple.
The Bottom Line
Loans provide affordable long-term financing but can be hard to qualify for. MCAs offer quick financing even for newer businesses, but at a much higher cost.Carefully consider the pros and cons, costs, and eligibility requirements before choosing your best business financing option. And be cautious – while MCAs are easy to get, they can lead to a cycle of debt if used improperly.