What are the differences between a merchant cash advance and traditional small business loans? Understanding the differences can be important for organizations seeking a quick source of capital.
The world of commercial finance can seem complicated to small business owners, especially if it’s your first venture. But Effective Funding is here to help you understand all your finance options.
What Is a Merchant Cash Advance?
A merchant cash advance (MCA) is an upfront lump sum payment in exchange for a future portion of a business’s revenue. The borrower receives an advance, which they are required to pay using a percentage of their business’s future receivables.
The repayment schedule can be daily or weekly. It functions as a quick source of capital for small business owners. The drawback is that merchant cash advances are priced higher than small business loans. A merchant cash advance often expresses the interest the lender must pay using a factor rate. While they cost more than traditional loans, MCAs can provide the cash you need right now, making them an ideal option during emergencies.
What Is a Traditional Small Business Loan?
Traditional banks have been offering small business loans for centuries. Many businesses that helped build the United States started with small business term loans.
Small business owners apply for a business loan, meet the requirements, and receive a lump sum of cash (if approved). The borrower makes payments over a period of time with a fixed or variable interest rate.
There are two types of traditional small business loans: short-term and long-term. Here’s a breakdown of each:
Short-Term Loan
A short-term loan is a typical source of capital for small business owners getting their company off the ground. It usually provides immediate funds in smaller amounts and can help with expenses such as inventory, marketing, and payroll.
Long-Term Loan
A long-term loan makes more sense for established businesses with a trustworthy credit history. Traditional banks have strict qualifying standards that might require a borrower to offer collateral.
What Are the Benefits of a Merchant Cash Advance?
There are many reasons why small business owners choose merchant cash advances over small business loans. Here are three main benefits of a merchant cash advance:
- It’s easier for a small business owner to get approval for a merchant cash advance. Unlike small business loans, they’re not dependent on credit scores.
- The payout for a merchant cash advance is quicker than a traditional small business loan. A business might receive an advance in as little as 24-48 hours after the application. For this reason, same-day business funding is ideal if you need cash quickly.
- A merchant cash advance provides increased flexibility for a repayment term. A merchant can receive a large sum of money upfront and make small daily or weekly payments over time. It can provide a lifeline to small businesses that have a financial emergency.
Which Option Is Right for Your Business?
Now that you understand the difference between merchant cash advances and small business loans, you can weigh which option is right for your business. Here’s a breakdown of the two financing options and when each option would best suit your small business:
A merchant cash advance (MCA) is best when:
- You need same-day funding. Without an endless line of documentation, MCAs allow you to receive a cash advance the same day you request funding. This allows you to keep operations running even during emergencies.
- You can’t qualify for other financing options. You don’t need good credit or collateral to receive a merchant cash advance.
- You can handle a hit to your cash flow. Be sure that daily or weekly payments won’t hurt your business and offset the help of a merchant cash advance.
- You understand the terms of your agreement. Some providers have unscrupulous intentions. Before you sign an agreement, do your research to ensure the provider has your best interests at heart.
A traditional small business loan is best when:
- You qualify for a low interest rate. Businesses with good credit and healthy finances can obtain a large loan with a low interest rate.
- You want to make a large purchase. Term loans can provide money to purchase equipment, expand your business, or launch a new marketing campaign.
- You don’t have an ongoing need for funding. A small business loan will only give you a lump sum of cash once. If you need more capital, you will have to apply for another loan.
Learn More About Your Financing Options Today
Still uncertain whether a merchant cash advance or a small business loan would be better for your small business? The team at Effective Funding is here to help! Contact us today to find out more information about your financing options, including a business line of credit.
