Merchant Cash Advance vs Business Loan: Which Is the Best Option?
Running a business is not an easy task. It requires a lot of effort, time, and, most importantly, money. Every business needs a steady flow of cash to keep it running smoothly. However, sometimes businesses need additional funds to expand or overcome temporary cash flow problems. That's where merchant cash advance and business loans come in.
Merchant cash advance and business loans are both popular ways to obtain additional funds for your business. However, they are different in many ways. In this article, we will discuss the differences between merchant cash advance and business loans, their pros and cons, and which one is the best fit for your business.
What is a Merchant Cash Advance (MCA)?
A merchant cash advance is a type of financing where a lender provides a lump sum of money to a business in exchange for a percentage of the business's future credit card sales. The lender deducts the agreed-upon percentage of each credit card sale until the debt is paid off.
How Does a Merchant Cash Advance Work?
A merchant cash advance works by providing a business with a lump sum of cash, which is repaid through a percentage of the business's daily credit card sales. The percentage of each credit card sale that the lender takes is called the "holdback." The holdback percentage is typically between 10-30% and is deducted daily until the debt is paid off.
Pros and Cons of Merchant Cash Advance
Pros:
Fast and easy approval process
No collateral required
Bad credit is accepted
Repayment is based on daily sales, so the amount paid varies with business revenue
Cons:
High-interest rates
Short repayment terms
Daily holdback can impact cash flow
Can be more expensive than traditional loans
What is a Business Loan?
A business loan is a type of financing where a lender provides a lump sum of money to a business, which is repaid over a set period of time with interest.
How Does a Business Loan Work?
A business loan works by providing a lump sum of cash to a business, which is repaid over a set period of time with interest. The interest rate and repayment terms are agreed upon at the time of the loan. Business loans can be secured or unsecured, depending on the lender's requirements.
Pros and Cons of Business Loan
Pros:
Lower interest rates than merchant cash advance
Longer repayment terms
Larger loan amounts available
Can improve credit score if payments are made on time
Cons:
Requires collateral or a personal guarantee
Longer approval process
Good credit is usually required
Monthly payments can impact cash flow
When to Choose Merchant Cash Advance?
Merchant cash advance might be the right choice for your business if:
You need fast funding
You have bad credit
You don't have collateral to offer
You have a high volume of credit card sales
You want flexible repayment terms
When to Choose Business Loan?
Business loan might be the right choice for your business if:
You need a larger loan amount
You have good credit
You can offer collateral or a personal guarantee
You can wait for the approval process
Factors to Consider
When deciding between a merchant cash advance and a business loan, there are several factors to consider:
Amount Needed: Determine how much funding you need for your business. If you need a larger amount, a business loan might be a better fit.
Repayment Terms: Consider the repayment terms of each option. Merchant cash advance repayment terms are typically shorter and based on daily sales, while business loan repayment terms are longer and require monthly payments.
Interest Rates: Compare the interest rates of each option. Business loans usually have lower interest rates than merchant cash advance.
Credit Score: Your credit score can impact your ability to qualify for both options. Merchant cash advance is more forgiving of bad credit, while business loans typically require good credit.
Collateral: Determine if you have collateral to offer. Business loans usually require collateral, while merchant cash advance does not.
Conclusion:
Choosing between a merchant cash advance and a business loan can be a difficult decision. It's important to consider the amount needed, repayment terms, interest rates, credit score, and collateral requirements when making your decision. Both options have their pros and cons, so it's crucial to choose the one that fits your business's needs and financial situation.
Frequently Asked Questions
Q: What is the difference between a merchant cash advance and a business loan? A: A merchant cash advance is a lump sum of cash provided in exchange for a percentage of future credit card sales, while a business loan is a lump sum of cash provided with interest, to be repaid over a set period of time.
Q: Which option is faster to obtain?
A: Merchant cash advance is usually faster to obtain than a business loan.
Q: What credit score is required for a merchant cash advance or a business loan?
A: Merchant cash advance is more forgiving of bad credit, while business loans typically require good credit.
Q: Can I get both a merchant cash advance and a business loan at the same time?
A: It is possible to obtain both, but it is not recommended as it can impact cash flow and make it harder to repay both loans.