Cash Advances for Merchants Vs Business Loans – The Best Option
It’s not all the time during the year that 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 business loan. However, it is always best to understand both thoroughly before going out and applying 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 has been paid . This is best for a business like a restaurant or retail store that does 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 installment payments over an agreed 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:
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 vetted by federal authorities before being approved. You may need to research the qualifications banks or lenders look for to approve such loans. You’ll need at least two to three years of financial statements and a good credit report to get started. Also, it can take a while to get your loan approved in case of a BL. However, the MCA is easy to pass without many formalities.
The approval process
The approval process is quite liberal for merchant cash advances compared to business loans. All you need to show is that you have a good volume of credit card sales transactions. Even a statement of six months or a year should suffice. 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 your research on this before opting for one. Make a short list of a few lenders and find out how long they take to approve your loan, as long as you have all the documents in order. This should give you an idea of which would be best for your business.
The payment process
Unlike BLs where you have to pay a fixed amount every month (including interest) for a certain period of time, MCAs take a completely different route. The moment 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 in the case of commercial loans. The rate could even change after the initial time period. Unlike BLs, Merchant Cash Advance Funding would imply a higher interest rate, although it is not actually posted.
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 set-up fees, payment fees, and processing fees that can even add up to more than the actual loan.
Both loans have their own set of pros and cons. The best option depends entirely on your business and your financial situation. If you think you’ll be able to pay a set amount every month, regardless of how much money you make, a BL would be right for you. However, if you are not comfortable paying your operating expenses, you should go with an MCA.
Yes, the costs and interest rates are definitely higher for MCAs; but you may not feel the pinch to pay them. Also, in case of emergencies, MCAs can be very useful as they are approved and processed quite quickly. For businesses that don’t have as good a credit report, an MCA might be the only answer.