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What is the Difference between a Business Loan and a Merchant Cash Advance?

Always do your due diligence by consulting with a professional business financial analyst to decide on any business financing solution to undertake.

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Similarities between a business loan and merchant cash advance
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Let’s discuss the difference between a merchant cash advance and a business loan. One of the most important steps for a business owner is deciding on the right financing solution. There is next to no business type that doesn’t require financing in one way or the other.

While opting for a business loan might seem like the right step to take, there are other business financing options you should consider. One of them is the merchant cash advance.

Getting business loans is common and overused sometimes, but the merchant cash advance has its benefits.

However, to decide which business financing option is right for your business, you first need to know the difference between business loans and merchant cash advances.

What is a Business Loan?

This is a business financing solution that involves borrowing a certain amount of money from a financial institution or alternative lender. There are also unsecured and secured business loan types. Secured business loans require collateral while unsecured business loans do not require collateral.

What is a Merchant Cash Advance?

As the name implies, a merchant cash advance is a business financing solution that involves the sale of some of a business’s future credit card and debit card sales. This type of business financing solution is offered by banks and legal money lenders, just as business loans.

In this financing option, a bank or legal money lending organization will give your business an advance on a fixed amount of money based on your business’s expected credit card and debit card sales.

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Differences between Business Loans and Merchant Cash Advances

There is a world of difference between business loans and merchant cash advances even though they both involve borrowing money from banks and legal money lenders.

To begin with, business loans have a stricter and fixed repayment schedule. After borrowing money following the business loan route, you must make regular payments or your collateral will be seized until you pay up your debt.

Most banks and legal money lenders require a monthly payment on loans taken without the opportunity for defecting.

Merchant cash advance on the other hand can be obtained without collateral, your business only needs to have a history of its credit card and debit card sales.

The lender will also verify your past sales to ensure your business can pay up this loan with ease. After verifying and analyzing the number of sales your business has made, the lender can go ahead to decide on the appropriate amount to “advance” your business.

As with everything surrounding business financing, there are advantages and disadvantages to business loans and merchant cash advances.

Advantages of Business Loans

The potential pros of taking a business loan for your business may include:

  • Maintaining business control: getting loans can be a way to help business owners fund their businesses. It’s a great way to expand your business without giving up control or making it public to sell shares.
  • Building credit score: making timely payments to business loans can help a business build its credit score and history. Take a look at this quick guide on how to improve your credit score.
  • Better financial management: by taking and paying back loans, business owners can easily predict how much they need to generate to keep the business running.

Disadvantages of Business Loans

Some problems a business might encounter from taking a business loan include:

  • Credit score requirements: before a business can apply for a business loan, it must have a good credit score.
  • Application procedures: some business loan application procedures are tedious, requiring collaterals and surety.

Advantages of Merchant Cash Advance

Some advantages of opting for a merchant cash advance include:

  • Easy access to funding: because of the flexibility of this business financing option, business owners can apply and get funding almost immediately.
  • Flexible requirements: most times, you do not need a strong credit score to get a merchant cash advance. Your business only needs to have a good amount of sales on their credit and debit cards.
  • Repayment based on sales: this business financing option doesn’t have a fixed or strict payment amount, instead payments are made based on a fixed percentage of sales made within a period. That means, that if sales are slow, the repayment amount may also decrease.

Disadvantages of Merchant Cash Advance

If you choose to get funding for your business via the merchant cash advance route, these are roadblocks you might encounter:

  • High fees: merchant cash advances come with high administrative fees, high factor rates, original fees, funding, or underwriting fees as against other business financing solutions.
  • Frequent repayments: as opposed to business loans, merchant cash advances are usually repaid in daily, or weekly repayments instead of the traditional monthly repayments.
  • No regulation: merchant cash advances are oftentimes not secured since they are not recognized as traditional loans. This makes them not subject to federal and state lending laws and can pose potential risks for the borrowers.

Business Loan vs Merchant Cash Advance: Which is Best for Your Business?

It is important to take into account the differences between a business loan and a merchant cash advance and how it affects your company. Merchant cash advances for instance comes with low borrowing amounts and short repayment period as against business loans.

Fees and requirements for business loans and merchant cash advances are also different. More traditional loans come with fixed or floating interest rates, which apply to the remaining balance of the loan taken.

If a borrower pays off their loan earlier than the stipulated repayment period, they get to maximize the interest paid on the loan. Merchant cash advances often charge several fees and use factored rates, which apply to the overall borrowed amount upfront.

This can cause higher financing costs than other traditional loan options. Paying back the loan earlier than the stipulated period doesn’t also reduce these fees. In the end, the option you decide to go with depends on the needs of your business now.

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Can I Pair Business Loans with Merchant Cash Advances?

Yes, you can. A business loan can complement a merchant cash advance. You can use a business loan to expand your business by purchasing new equipment or renting/building a new office or operation space.

Alternatively, you can use a merchant cash advance to quickly access funds for more pressing needs for your business. Some great examples of such pressing needs are utility or emergency expenses.

Conclusion

Always do your due diligence by consulting with a professional financial analyst. They can help you to decide on any business financing solution to undertake.

A specific business financing option can make or break your business’s finances when used without prior knowledge and experience.

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Lilian Orji is an SEO content writer who helps small and medium enterprises in their business management, finance and growth. She's a contributor at EntrepreneurBusinessBlog.com. You can reach her via email, [email protected].

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