Business Credit Cards vs. Merchant Cash Advances for Small Business Funding

male business owner making a purchase on his laptop using a business credit card
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When a small business needs access to more working capital, two options commonly come to mind first: apply for a small business loan or get a business credit card.

Small business loans are ideal for when you need larger amounts of capital to help support your growth or recover from an unexpected setback, but they often have strict approval requirements and long application timelines. They are also very difficult to acquire from traditional lenders, especially if you need a smaller loan under $500,000.

Business credit cards, on the other hand, are typically easier to access, are ideal for covering everyday operating expenses, and often provide high enough credit limits to support smaller growth initiatives. They also have drawbacks—it’s easier to slip into debt if you can’t pay your balance in full each month, and high credit utilization can negatively impact your business credit score.

In some cases, neither of these options work well for a small business—if you need a smaller amount of funding, you already have a business credit card, or you’re watching your credit utilization, for example.

Another non-loan form of financing called a “merchant cash advance” (MCA) can help business owners support their growth. MCAs function differently than traditional small business loans and business credit cards — instead of providing a revolving line of credit or a lump sum that is repaid in monthly instalments, MCAs are a purchase of future receivables. You’ll still receive a lump sum of working capital up front similar to a small business loan, but instead of paying it back in regular monthly intervals, a percentage of your daily debit and credit card sales will be automatically deducted until the advance has been repaid (plus any applicable fees). MCA funding can be used however you like, whether you need funding to boost your marketing, purchase inventory in bulk, or cover an unexpected expense.

We’ve already compared merchant cash advances to other types of small business financing, so in this post, we’ll focus on how MCAs compare to another common source of working capital: business credit cards.

At a Glance: Business Credit Cards vs. Merchant Cash Advances

Business Credit CardMerchant Cash Advance
Loan AmountDepends on your creditworthinessUp to $500,000
Loan TypeRevolving line of creditNon-loan form of financing called an “asset purchase”
FeesTypically 19%-23% APRBased on a factor rate, typically around 1.5
QualificationsStrong personal creditFlexible requirements with more focus on business potential than financial history
RepaymentMinimum monthly payments with the ability to repay the balance in full each month to avoid interest chargesA percentage of daily or weekly debit and credit card sales is deducted until the advance is repaid
Ideal UsesCovering ongoing operating expensesFunding growth strategies or covering unplanned expenses

Pros and Cons of Business Credit Cards

Business credit cards provide a revolving line of credit that offers ongoing access to working capital. Let’s take a closer look at the advantages and disadvantages of business credit cards.

Pros of business credit cards

Business credit cards offer a number of advantages, including fast access to working capital and unique rewards programs. They can also help you build a strong credit score for your business as long as you pay your balance in full and on time each month.

  • Interest: With a business credit card, you can avoid interest charges altogether if you pay off your balance in full each month. Term loans and other forms of small business financing will always include interest or other fees such as a factor rate, even if you make your payments on time.
  • Approval requirements: Business credits cards have potentially easier approval requirements that depend more on your personal credit than your business history. Easier requirements often means you’ll receive a faster approval decision, which in turns means you’ll have quicker access to working capital.
  • Rewards: Many business credit cards offer rewards programs like points, air miles, or cash back. Do your research before you choose a credit card to select the rewards program that will be most beneficial to you.
  • Credit score: Using and promptly repaying your business credit card can have a positive impact on your business’s credit rating. This is especially important for new businesses who are just establishing and building their business credit.
  • Uses: There are no restrictions on what you can use a business credit card for, though they are typically best used for covering everyday expenses. Restrictions may apply on what spending qualifies for your rewards program.
  • Financial management: With all your expenses included in a single statement, business credit cards make it easier to track your business spending in one place.
  • Collateral: No collateral is required to get a business credit card, though a personal guarantee may be required.

Cons of business credit cards

While they do offer some compelling advantages, business credit cards have drawbacks as well, including exorbitant interest fees and a greater potential to negatively impact your credit score.

  • Fees: Fees and interest on purchases made using a business credit card can be very expensive, sometimes up to 29.9% APR. Interest rates are often very high and can fluctuate because they depend on the prime rate—if the prime rate rises, so will your interest rate. There may also be other fees to consider, such as annual fees, late payment fees, and cash advance fees.
  • Missed payments: Paying the minimum monthly payment or missing payments can result in significant interest charges and other fees.
  • Credit utilization: Carrying a high balance on a business credit card can negatively impact your credit score. Both business and personal credit bureaus will factor your total credit utilization into your credit score, including business credit card utilization.
  • Easy to slip into debt: It can be tempting to spend up to your credit limit, which decreases your debt-to-credit ratio and can drag down your credit score as well as make it very difficult to pay off your balance once fees start accumulating.
  • Credit limits: Business credit cards may have lower limits than other forms of funding, depending on your creditworthiness. Business owners can often get more capital for their business using a merchant cash advance.
  • Guarantee: You may be required to provide a personal guarantee to get a business credit card.

When to get a business credit card

Business credit cards are ideal for covering normal day-to-day expenses, and are not typically recommended for funding larger growth initiatives. In fact, it’s often recommended that small business owners get a business credit card as soon as they can in order to keep their business expenses separate and begin to build a strong credit history.

Here’s when a business credit card makes sense:

  • If you’re looking for access to more working capital to help cover smaller, general business expenses, such as ongoing purchases and expenses that you are able to repay each month.
  • You’re working to build your credit score—a business credit card separates your personal and business expenses, and paying off your balance in full each month can help build a strong credit score.

Pros and Cons of Merchant Cash Advances

A merchant cash advance is a non-loan form of financing known as an “asset purchase”. You’ll receive working capital up front in exchange for a percentage of your daily or weekly debit and credit card sales until the advance has been repaid. Let’s take a look at the pros and cons of MCAs and when they make sense for your business.

Pros of merchant cash advances

Merchant cash advances offer a number of compelling advantages that set them apart from business credit cards, including no fixed monthly payments and simpler applications.

  • Fast turnaround: MCAs are typically one of the fastest forms of funding available, with funds sometimes made available in less than one business day.
  • Simple application: Merchant cash advances have a much simpler application with less paperwork to complete than other forms of business financing, including business credit cards.
  • Flexible approval requirements: MCAs offer easier approvals with more flexible requirements that focus more on a business’s potential than its past. This makes merchant cash advances ideal for younger businesses or businesses with low credit.
  • Funding amount: A business credit card may not have a large enough credit limit to support your goals, and financing growth on credit isn’t always recommended. Plus, most traditional lending institutions prefer to grant larger loans that will generate more profit over the life of the loan. With funding up to $500,000 available, merchant cash advances are an ideal middle ground between the smaller credit limit of a credit card and the larger amounts preferred by traditional lenders.
  • No fixed monthly payments: Instead of fixed monthly payments, payments for a merchant cash advance are automatically deducted from your daily or weekly debit and credit card sales. Payments fluctuate with your sales, so on slow days, your payment is simply lower.
  • Uses: There are no restrictions of how funds are used. MCAs are ideal for supporting larger growth initiatives such as boosting your marketing or purchasing inventory in bulk.
  • Collateral: No collateral is required to acquire a merchant cash advance.

Cons of merchant cash advances

Like all forms of small business financing, merchant cash advances have some drawbacks as well.

  • Fees: Merchant cash advances may be more expensive than other forms of financing depending on your risk assessment. Fees are based on a factor rate, which works differently than typical interest rates.
What is a factor rate?

Unlike interest rates, which can compound as you pay off your loan, a factor rate is a simple decimal figure that shows how much “extra” you will owe on the original amount of the loan. For example, if you borrow $1,000 at a factor rate of 1.5, you’ll owe $1,500.

  • Terms: MCAs typically have shorter terms than other forms of financing. This may be ideal depending on your goals, but if you’re searching for an ongoing source of funding or need a larger loan to cover a major investment such as real estate, a business credit card, business line of credit, or term loan may be a better option.
  • Repayment frequency: For some business owners, the daily or weekly frequency of MCA payments can be a detriment to their cash flow. For others, this is an easier method than making a minimum monthly payment.
  • Payment methods: Your business must accept credit card payments to qualify. MCAs are typically ideal for businesses that process a high volume of card payments.
  • Repayment timeline: If your sales are low, your payments will be lower and it will take longer to repay your merchant cash advance.

When to get a merchant cash advance

With maximum funding amounts that typically fall between the standard credit limit for a business credit card and the larger amounts often preferred by traditional lending institutions, merchant cash advances are ideal for when:

  • You need funding to support your growth or ROI goals, but you need a smaller amount of funding than traditional lenders typically prefer to grant. With funding up to $500,000 available, MCAs can be used to fuel a larger growth plan or to take advantage of a short-lived opportunity to grow.
  • You need funding quickly to cover unplanned expenses. With a simpler application process and faster approval timelines, you can get the funding you need in as little as one business day.

Business Credit Cards vs. Merchant Cash Advances

Business credit cards and merchant cash advances each offer their own unique set of advantages and disadvantages. Both can be useful to small business owners:

  • Business credit cards are best used for ongoing expenses you know you can repay in full each month.
  • Merchant cash advances are ideal for financing growth strategies such as marketing plans, purchasing inventory in bulk, or investing in new equipment.

Merchant cash advances are available from alternative lenders like Greenbox Capital®. With a streamlined application process and flexible approval requirements that are based on your business’s potential (not just your credit score), you can receive your merchant cash advance funding in as little as one business day.

Learn more about merchant cash advances
  1. Small-Business Loan vs. Business Credit Card: How to Choose“. Steve Nicastro. Nerdwallet. October 19, 2017.
  2. Merchant Cash Advance“. Gerri Detweiler. October 21, 2020.
Jordan Fein
Author: Jordan Fein
Contributor and expert in finance and loans, business and economics