Your business is growing. That growth is great, but it’s leading to more demands on your money. You need to finance inventory, purchase office supplies, and run marketing campaigns. You don’t have enough capital to do everything. So what can you do?
Merchant cash advances and business loans are ways to finance small businesses. Both allow a company to accept financial assistance to pay for their needs. Both have different strengths and weaknesses. The following is everything you need to know about whether you need a merchant cash advance or business loan.
Table of Contents
- What is a Merchant Cash Advance?
- What is a Business Loan?
- What are the Pros of Merchant Cash Advances?
- What are the Cons of Merchant Cash Advances?
- What are the Pros of Business Loans?
- What are the Cons of Business Loans?
- What Are the Differences in Merchant Cash Advance vs Business Loan Qualifications?
- Where Can I Get a Merchant Cash Advance?
- Where Can I Get a Business Loan?
- Final Thoughts
What is a Merchant Cash Advance?
A merchant cash advance, or MCA, is not a loan. Instead, a lender will advance a company the cash it needs in exchange for a percentage of future sales, often from credit card and debit cards. There is also a small fee. If you’ve heard of ACH loans, they’re quite similar.
Merchant cash advances come in two distinct types. The first option provides up-front cash in exchange for a percentage of daily credit and debit card income. The second also provides up-front cash, but the business owner repays it by sending money in fixed increments.
What is a Business Loan?
A business loan is precisely what it sounds like it is. A financing institution lends a company a specific amount of money in return for fixed or regular payments. The payments are made at an interest rate that the lender determines.
Small business loans vary in size from $5,000 to $500,000. They can come from a variety of sources, including traditional banks and online lenders. Whether the loan is short-term or long-term depends on the individual needs of the business. An LLC loan will differ from a loan for sole proprietors for example.
What are the Pros of Merchant Cash Advances?
Merchant cash advances are catching on as a source of quick capital. Even companies like Square Capital and PayPal offer them now. Here are three reasons for their growing popularity.
- Fast and easy – The biggest pro of a merchant cash advance is how simple the process is. There is little paperwork to fill out, and money is available in a day or two. That way you can spend more time running your business.
- More flexible eligibility requirements – Even if you have bad credit or collateral, you can get a business cash advance. This benefit makes MCAs a more enticing option for new or struggling business owners, compared to business loans. They are also an opportunity to get needed financing if you have already been turned down for a loan.
- If sales are down, your payments may be too – The merchant cash advance repayment is based on a fixed percentage of sales. So if you take out an advance and sales are down, your repayment will likely be too. That also eliminates the need to worry about fixed repayment terms.
What are the Cons of Merchant Cash Advances?
While the merchant cash advance has its strengths, there are weaknesses. Some see it as a financing option of last resort. Here some factors to consider before applying for an MCA.
- A Higher cost of borrowing – The average APR of a business loan is 14 to 50 percent. Merchant cash advances, on the other hand, range from 80 to 120 percent, so borrowing money will cost you more than if you received a loan.
- Higher sales mean a higher APR – Because you repay a merchant cash advance with a percentage of your credit card and debit card sales, APR depends on both the total fees paid and the payment method. If sales are slow, your repayment drops and is spread out over a more extended period. But if sales boom, so does the cost of repayment.
- No benefits of early repayment – Traditional loans reward borrowers who can pay them off faster. A merchant cash advance has a fixed amount of fees, however, so you are paying no matter what. Some companies even charge early repayment fees.
- No federal oversight – Merchant cash advances are run as commercial transactions. As a result, they are not subject to federal regulations. Instead, they fall under the regulation of the Uniform Commercial Code.
What are the Pros of Business Loans?
A business loan can be a reliable short-term infusion of capital for your business. While there are stricter requirements to get them than merchant cash advances, they should be among the primary options for business financing. These are some of the primary reasons business owners opt for loans.
- Lower overall costs – Business loans come with dramatically lower APRs than merchant cash advances. That means the money you borrowed will receive at a lower interest rate. Plus, if your business is booming, you can pay back the loan early and avoid paying extra interest.
- Enhanced business reputation – Merely being eligible for a business loan is a good sign. If you can borrow and then repay the loan plus interest, it will demonstrate your reliability and trustworthiness in the financial realm. As a result, lenders are more likely to work with you in the future and offer even better terms.
- Fixed repayment term – When you take out a business loan, you pay it off at regular intervals. This system can make budgeting around the fixed term easier when it comes to determining other business expenses. There is no harm in having one less thing to worry about.
What are the Cons of Business Loans?
Business loans are not all fun and games. They have some drawbacks too. Here are a few reasons to carefully consider whether a business loan is right for you.
- More difficult to obtain funding – Lenders only want to extend credit to borrowers that are likely to repay them. Because of this, financing institutions can be selective when it comes to who give money to. If you are a well-established business with a secure financial history and a promising future, there is nothing to worry about.
- Fixed repayment term – You read that correctly. The fixed repayment can be a pro and a con. The negative comes when you get a business loan, and your company sales don’t grow. You will still be stuck with the same fixed loan payment and no more capital than you had originally.
What Are the Differences in Merchant Cash Advance vs Business Loan Qualifications?
While both boost your business with capital, the qualifications for the merchant cash advance and business loan are discernibly different. For starters, an MCA focuses more on your credit card and debit card sales. That’s why retail stores and restaurants are preferred clients.
Beyond that, a business must actually have been operating for at least six months before asking for an MCA. The business must also have a monthly revenue of $15,000 or more. Finally, the credit score must be at least 500 points or higher.
Similarly, business loans require a 500-point minimum for a credit score, but the similarities end there. A business must have been in operation for at least a year before qualifying for a loan. Business loans also require a minimum of $100,000 in annual revenue.
Where Can I Get a Merchant Cash Advance?
The growing popularity of the merchant cash advance means more financial lenders are starting to offer them. Besides Square Capital and PayPal, two of the more prominent names in the MCA sphere, there are plenty of other trusty lenders out there, including Iruka Capital.
Where Can I Get a Business Loan?
Getting business loans typically starts with shopping around for different vendors. These can include traditional banks, credit unions, and other investment companies. Each lender can offer different terms for your business loan, so make sure to find one that best matches your needs.
The most important part of the process is choosing a lender you can trust. Find one that understands the needs and goals of your small business and is open and transparent about their process. Once you find a lender you like, all you have to do is submit an application and wait to hear back.
If your application is approved, you are heading in the right direction. More often than not, having a low-interest loan is your best option. There are circumstances, though, where slightly less favorable terms and increased convenience is what you need.
Whether you chose a merchant cash advance vs business loan depends on many factors. There are no definitive right answers. In either case, carefully weigh the pros and cons of each before deciding. The financial future of your business depends on it.