Business loans and Merchant cash advances are the two primary commercial financing options assisting micro-businesses with working capital today. And while each of them can be a great way to obtain business funding, the two products have very different structures.
To help you draw the line between cash advances and small business loans, here’s an in-depth comparison of the two.
The Fundamental Differences
Business Loan – just like you would seek funds for a new automobile or home, there are also loans meant for business. They usually have fixed repayment terms (say monthly installments) and pre-determined interest rates.
A Merchant cash advance – in essence, it is a way of selling a small portion of your company’s future/impending credit card sales and getting advance cash in return. The funder buys a part of your future credit/debit card sales then later reclaims the amount advanced by slicing an agreed percentage of the total credit card sales you make. Hence, cash advances don’t have fixed repayment terms: you agree upfront on the amount and percentage to be remitted.
However, it should be understood that the two products both serve as working capital loans—they help companies buy equipment, meet payroll, grow operations, and cope with changing seasons.
Discover more primary differences between the two in the table below.
Business Loan Vs Merchant Cash Advance
How the Financing Works – You get a Loan and Repay in Fixed Monthly Installments
Payback Schedule – You Pay a fixed amount Based on Principal plus an Interest
Major Qualifications – Annual Revenue & Good Personal Credit Score
Maximum Amount you can borrow – $5,000 – $500,000 (Up To 20% Annual Revenue)
- Your credit is good– 640 or more plus a clean credit report (free of a recent tax lien or bankruptcy).
- Your business is established and profitable–you’ve been operating a money-making business for over a year and can enjoy traditional business borrowing options?
- You need a large sum of money – loans have higher limits, MCA is tied to the average amount of credit card sales you make.
- You want stable repayment terms – Business loans have conventional installment payments.
Merchant Cash Advance:
How the Financing Works – You get an Advanced Sum and pay back as a Percentage of your day –to-day Daily Credit Card Sales
Payback Schedule – Amount Varies Based On a Percentage of Daily Credit Card Sales
Major Qualifications – Steady Deposits and Sales History
Maximum Amount you can borrow – $5,000 – $500,000 (Up to 50% Annual cash revenue)
- You’re avoiding unpaid loans on your credit report
- Your business is seasonal –MCA settlement terms work well for seasonal businesses. You repay less when making less revenue and
- more during high seasons.
- Your store is online.
There are no differences between these two commercial funding products that haven’t been discussed above. Choose whichever meets your individual needs.