Difference between merchant cash advances and business loans


Numerous key distinctions exist between a merchant cash advance and a typical business loan. The MCA was created as an alternative to a company loan to provide restaurants and stores, whom banks typically neglect, immediate access to short-term operating cash. This article will compare their main differences for assistance in choosing between an MCA and a business loan.

Advance, Not Loan

A merchant cash advance for small businesses is just that—an advance! In other words, the cash advance company is now giving you what they anticipate you to earn (your “future receivables”). If you borrow $100 now, the supplier will buy $120 in future receivables. Your company will pay a predetermined percentage of each dollar collected until it pays the supplier for all receivables it bought.

How is this different from a loan?

MCAs and loans vary in various ways. Amount and duration are major distinctions. Loan repayment schedules are constant throughout time. Because income might fluctuate, an MCA’s payment schedule is merely an estimate. MCA payments are based on revenue. Since your payment is a proportion of revenues, receivables might raise or reduce it. Therefore, if your payment quantity lowers, your predicted payment duration lengthens, and vice versa. An MCA requires a predetermined payment amount, agreed upon ahead, regardless of the payment duration.

Is Interest Due?

MCAs cost money but not interest. The supplier will state the amount of future receivables they buy when making an offer. The “factor rate” is the percentage of receivables acquired to advances. A lender giving $100 for $120 of future receivables has a 1.2 factor rate. All else being equal, greater factor rates cost more.

If My Revenue Falls?

No one wants to be unable to pay their bills, yet it happens for many reasons. If business plummets, your payments might be changed. If your company survives and flourishes, everyone benefits.

An MCA sounds great—is it hard to get?

MCAs were created to help small company owners get funds quicker and simpler. Getting an MCA is easier than a business loan. Here are some reasons:

  • Traditional business loans need a two- to three-year track record, whereas MCA providers just assess your revenue for the previous three to six months. You may qualify for financing if your sales volume is consistent or growing across transactions.
  • Business cash flow vs. personal credit: Most banks and traditional lenders prescreen business loans using FICO ratings. Despite sacrificing personal credit to invest in their company, small business entrepreneurs often cannot secure commercial loans. MCA providers prioritize firm cash flow above FICO; hence, their minimum FICO is lower than a bank loan.
  • Complete Financial Package vs. Basic Documentation: For their speed, MCAs appeal to small business owners. MCA providers assess financial factors that impact your ability to pay, whereas traditional business loans need extensive paperwork. This usually requires a credit application and months of bank statements. Thus, an MCA provider may have deposited monies into your account while you assemble business loan application documents.

A Comparison

MCAs maintain a stable percentage of revenue for daily, weekly, and monthly payments. Term loans have set payments. By adjusting your payment up and down according to revenue, an MCA allows you to save more when business slows and pay quicker when it picks up.

Which product is best for me?

Like most commercial matters, it depends. A bank or credit union business loan is cheaper and gives you more time to repay. However, missing payments lengthen the term and increase interest. Getting one is hard, time-consuming, and complicated. Qualification usually requires a lengthy track record of profitability, good credit, and loads of paperwork. An MCA may be ideal if you need operating money urgently, have bad credit, or want a simple procedure.

Success requires a defined use of cash and a payment plan for any funding. After that, an MCA or standard business loan may be good for:

  • Bulk buying reduces inventory expenses.
  • Bridging cash flow shortages till customers pay
  • Utilizing growth or cost-saving possibilities
  • Unexpected difficulties persist

Still not sure

The good news is that Fundshop can help! Fundshop wants to help you with funding for your business. Call Fundshop to speak to a funding specialist, or apply now to learn more!