Merchant Cash Advances Vs Business Loans – The Best Option

Not all the time during the year you can make great deals that provide you with all the cash flow you would need to succeed and grow. There are times when you may be in dire need of funds just to keep your doors open or even expand.

As a business, your best option would be to opt for a merchant cash advance or a business loan. However, it is always better to understand both thoroughly before you go out and apply for one.

Merchant Cash Advance

A Merchant Cash Advance (MCA) is a cash advance given to you in advance in exchange for a certain percentage of your credit card sales volume, until the full amount is paid . This is best for a business like a restaurant or retail store that makes a lot of credit card sales on a daily basis.

business loan

A Business Loan (BL) is one that offers you cash up front in exchange for fixed monthly payments over an agreed-upon period of time. The terms in this case are quite flexible and you can choose what best suits your business.

Differences Between Merchant Cash Advances and Business Loans

Although both options work well for businesses, they differ from each other in the following ways:

loan structure

While a business loan is legally considered a loan, an MCA is not. The former is generally subject to certain limitations and must be reviewed by federal authorities before being approved. You may need to research the qualifications banks or lenders are looking for to approve such loans. You’ll need at least two or three years’ worth of financial statements and a good credit report to get started. Also, it may take a while to get your loan approved in case of a BL. However, the MCA is easy to get approved without many formalities.

The Approval Process

The approval process is fairly liberal for merchant cash advances compared to business loans. All you need to prove is that you have a good volume of credit card sales transactions. Even a statement of six months or a year should be enough. It doesn’t matter what your credit report looks like. Approval is almost instant and within two to three business days you should have the amount with you.

Business loans, on the other hand, require a lot of things to get approved. Lenders look at your cash flow reports, credit reports, financial statements, and industry metrics before deciding whether or not you deserve the loan. After analyzing the risk factor, they determine the interest rate that they will charge you.

Funding Speed

Although this may differ from lender to lender, MCAs are generally approved faster than BLs. However, you may need to do some research on this before opting for one. Make a short list of some lenders and find out how long it takes to approve your loan, as long as you have all the documents in order. This should give you an idea of ​​which one would be best for your business.

The payment process

Unlike BLs where you have to pay a fixed amount every month (including interest) over a certain period of time, MCAs take a completely different route. At the time there is a credit card sales transaction at your POS, a certain percentage of the billed amount is automatically credited to the lender’s account. This does not affect your operating expenses in any way. Also, it doesn’t matter how much money you pay every day. It all depends on the type of business you get. Considering the ease of payment, an MCA can definitely be a better option.

Interest rates

Interest rates are generally defined and published for business loans. The rate could even change after the initial time period. Unlike BLs, Merchant Cash Advance Funding would carry a higher interest rate, although it is not actually published.

Other costs

Business loans are pretty transparent when it comes to costs. They do not imply any extra charge beyond what is mentioned. However, MCAs include many other costs, such as setup fees, payment fees, and processing fees that can even amount to more than the actual loan.

Both loans have their own set of pros and cons. The best option totally depends on your business and your financial situation. If you think you’ll be able to pay a fixed amount each month, regardless of how much money you make, a BL would be ideal for you. However, if you are not comfortable paying your operating expenses, you should opt for an MCA.

Yes, the costs and interest rates are definitely higher for MCAs; but you may not feel the pinch of paying them. Also, in emergencies, MCAs can be very helpful as they are approved and processed fairly quickly. For businesses that don’t have such a good credit report, an MCA might be the only answer.