Merchant Cash Advances vs. Small Business Loans: How Are They Different?

Merchant cash advances and small business loans are alike in that they both provide borrowers the funds they need for many business-related efforts. But they are different in many ways, ranging from how people pay them back to the charges associated with each. Here’s a comparison of these two and how they are different from each other.

How the Money Is Paid Back

A merchant cash advance and a small business loan will entail a business borrowing money from a lender or service provider. The group will use that money for whatever operating needs it may hold.

The way the money is paid back will vary. For a loan, the business must pay back the value with a set amount of money each month. The group pays back the loan in regular installments.

For a cash advance, the business will pay back the total based on the credit card statements it receives. The company will pay a set percentage of whatever it gets in credit card payments each day.

How Much Money Will I Get?

Businesses can qualify for varying amounts of money when getting an advance or loan. But the total amount someone will get will vary by investment.

A loan can be worth immense amounts of money. It could be worth millions of dollars if necessary. Smaller term loans worth tens of thousands of dollars can also work.

A merchant cash advance can cover significant amounts, but whatever a business gets will vary surrounding one’s expected sales. A company can get more than 200 percent of one’s expected sales through an advance.

What Charges Work?

The charges for each solution are also different. A loan entails interest charges that are based on the principal or original amount of money the borrower needs to cover. The interest charges can vary surrounding how much money is remaining on the principal. A person might potentially pay off extra amounts to reduce the interest, although not all loans will provide this benefit.

Loans may also be subject to various fees. These include maintenance and processing fees, plus additional charges for work. A down payment that covers a percentage of the loan may also be necessary at the start.

A merchant cash advance entails a factor rate instead of interest. The factor rate is a decimal that measures how much someone will pay to cover the cost of the advance. For example, if the factor rate is 1.2, that means the person must pay back the advance value plus 20 percent of that original value. The factor rate remains the same during the life of the deal.

The factor rate sounds useful, but the APR may be higher than what a loan provides. A business should review what loans are available surrounding possible interest payments and what advances are open and how their factor rates will work.

Term Length

A loan includes a set term length. The business will pay for the loan during that time frame. Some loans allow a company to pay it off early, although there could be some early repayment fees depending on what works here.

A cash advance does not have a specific term. The business will continue paying off the advance with its credit card receipts for as long as necessary. A provider can offer an estimate for how long it would take to pay it off based on current credit totals and how much will be paid each day, but the timeframe could be shorter or longer depending on credit card sales totals.

Qualification Considerations

A merchant cash advance is available based on one’s business cash flow. A business with a greater and more consistent cash flow may qualify for a better factor rate. The group will be more likely to cover the advance total in less time, reducing the possible expense.

It is harder for companies to qualify for loans. A credit review is necessary to determine if a business can afford to pay off the loan. Those who are at high risk may be subject to higher interest rates or charges, or they may not have access to as many funds. There’s always the chance the business may not qualify for a loan due to its poor credit history or its significant risk level for the work.

What About Declining Revenues?

A merchant cash advance is best for businesses that might experience unpredictable revenue shifts. A loan is better for ones who have predictable and consistent revenue flows. The loan payments are always the same throughout its term, while an advance provides flexibility.

Liability Concerns

A merchant cash advance is unsecured, as it is paid back through future credit card receipts. The business sells a percentage of those receipts to the lender and uses that as collateral.

A small business loan will often require physical or operating collateral. It can entail equipment, a vehicle, or various other assets in the workplace. The lender has the right to revoke the collateral from the borrower if that person cannot pay for whatever someone holds.

Which Is Better?

There’s no definite answer to this question, as merchant cash advances and small business loans are useful for various needs. A loan is ideal for businesses that have been around a while and can afford something with predictable payments. An advance works best for newer entities that don’t have as much history and need extra assistance in keeping their businesses running well.

The amount of money in question is also a factor to note. A loan works well when people need more money for long-term plans, but an advance is suitable for more pressing needs that demand a resolution to their needs or concerns now.

Any group that needs extra money for any purpose should look at what makes these two distinct. A company should review its credit status, its cash flow, and its future plans for earning money to see what fits. It will be easier to make the right choice after planning one’s work.

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