This is a very common question we hear, so we decided to address it as one of the FAQ’s. Merchant cash advances and business loans are both great financing options which provide small business owners with the working capital they desire.
The way the financing methods are structured differ greatly. You must compare and contrast the two, in order to see why one is the right choice for you.
One of the best ways to grow a business is get a term loan. The rates are lower than a merchant cash advance. For example, you can get a term loan with rates starting at 4-5%. Merchant cash advances and business loans BOTH provide working capital. The financing you get from these two tools help you purchase equipment, expand your operation, meet payroll, etc.
Merchant Cash Advance Vs. Business Loans
Merchant cash advances are given in return for a % of your future sales. Business loans are repaid in fixed monthly/weekly installments. The repayment term on merchant cash advances is variable, whereas in term loans it’s fixed. Typically with a merchant cash advance, the APR can be 60-100%, in contrast to business loans that have an APR of 14-40% When it comes to business loans, the main qualifier is annual revenue and credit score. In contrast, merchant cash advances focus on credit card sales and credit score. On average it takes 1-3 days to fund either product.
How Business Loans Work
Short term business loans are a common way of getting financing for working capital. Business loans are like mortgage or auto loans. The lender is giving you a specific amount of money, in return for a fixed regular payment. The payments are amortized over the term of the loan, and the interest rate will range from 9% to 50%. The repayment schedule on a business loan can be daily, weekly, or monthly. There’s always a fixed maturity date with business loans, and you’ll be expected to repay the loan in full by that date.
How Merchant Cash Advances Work
Merchant cash advances aren’t technically loans. They are an advance on your future receivables. The provider of the merchant cash advance is purchasing your future receivables at a discount and charging you a factor rate in the place of an interest rate. The MCA provider gives you a lump sum payment which you repay with a % (hold back %) of your daily sales. The holdback percent is usually fixed, but the amount you repay daily is variable. Due to the variability of the term length, it’s common for APR to vary widely, and the term to range from 4 months to 16 months.
With an MCA you can expect to receive funding fast, due to the fact the primary factor is the strength of the business.
How to determine if a merchant cash advance or business loan is right for you
It’s important to understand how both can work for you. If you have a seasonal business, or don’t qualify for a business loan – then a merchant cash advance might be the only option for you.
When is a business loan a good idea
Businesses that have good credit, need a lot of capital, and want stable repayment terms should consider a business loan. The cost of a small business loan is lower than that of a merchant cash advance. If you qualify for a small business loan, you should consider this.
- Good credit – If your score is over 640, and you don’t have a bankruptcy / tax lien on your report, you can probably get approved for a business loan.
- You’re established – If you’ve been in business for more than a year and are profitable, then it’s likely you’ll get more in funding from a business loan.
- Need large amounts of capital – Most business loans provide for more capital than merchant cash advances.
When to consider a merchant cash advance
Merchant cash advances are a good idea if you don’t want your credit pulled, operate a seasonal / high risk business, or can’t turn to the banks for some reason. Due to the high cost of an MCA, you want to consider it as a last choice.