Business Line of Credit vs Merchant Cash Advance: Which Is Better for Your Needs?

For many small businesses in Canada, access to reliable financing can mean the difference between growth and stagnation. Whether you need to purchase inventory, manage seasonal cash flow, or invest in equipment, two popular funding solutions often come up: the business line of credit (LOC) and the merchant cash advance (MCA).

While both options provide quick access to working capital, they operate in very different ways. A line of credit functions like a revolving loan with flexible borrowing limits, whereas a merchant cash advance offers an upfront lump sum in exchange for a percentage of future sales. Understanding the mechanics, advantages, and risks of each option is essential before making a decision.

“Choosing the right financing product isn’t just about interest rates — it’s about aligning repayment structures with your business’s cash flow,” explains Nick Yatros, Funding Advisor at Greenbox Capital.

Business Line of Credit Explained: Key Features and Benefits

A business line of credit is a flexible financing tool that works similarly to a credit card but with usage-based pricing and flexible access to capital. Once approved, a lender grants your business access to a maximum credit amount, which you can draw from whenever necessary. You only pay interest on the portion of funds you use, making it a cost-effective solution for ongoing or unexpected expenses.

Key Features of a Credit Line for Business:

• Flexible borrowing: Withdraw funds as needed, up to a set credit limit.
• Interest efficiency: Pay interest only on the amount used, not the total credit line.
• Revolving structure: As you repay, the available credit replenishes.
• Eligibility requirements: Typically requires a good business credit score, stable revenue history, and in some cases, collateral.

Pros and Cons of a Business Line of Credit

Merchant Cash Advance (MCA) Explained for Small Business Owners

A merchant cash advance is not technically a loan but rather a financing agreement. The provider advances a lump sum of capital upfront, which the business repays through a fixed percentage of its daily or weekly sales. This structure ties repayment directly to revenue, making MCA appealing for businesses with high credit card transaction volumes.

Unlike a line of credit, an MCA is less about managing liquidity over time and more about providing quick, lump-sum access to funds that adjust automatically with sales performance.

Key Features of a Business Cash Advance:

• Revenue-based repayment: Payments fluctuate with your sales volume.
• Speed of funding: Approval and funding can often occur within 24–72 hours.
• Credit flexibility: Approval relies more on sales history than on credit scores.
• Cost structure: Uses a “factor rate” instead of a traditional APR, often resulting in higher overall costs.

Pros and Cons of a Merchant Cash Advance

Business Line of Credit vs Merchant Cash Advance — Key Differences

While both a business line of credit and a merchant cash advance give small businesses fast access to capital, their structures, costs, and requirements make them suitable for very different situations.

Speed of Funding

• Line of Credit: Approval often requires detailed financial statements, a credit check, and sometimes collateral. The process can take several days to a few weeks.
• MCA: Funds are typically available within 24–72 hours, making it the faster option.

“Time matters, especially for retail and seasonal businesses. While an MCA may win on speed, a line of credit is more sustainable for long-term growth,” explains Nick Yatros, Funding Advisor at Greenbox Capital.

Cost and Repayment Terms

• Line of Credit: Interest is charged only on the amount drawn, not the entire limit. In Canada, business line of credit rates are typically offered at prime plus a margin. Depending on the lender and the borrower’s profile, this margin can range from a few percentage points for strong credit applicants to double-digit add-ons for higher-risk businesses.
• MCA: Uses a factor rate instead of a traditional APR. A factor rate of 1.3 means a $100,000 advance must be repaid as $130,000, regardless of how quickly it is paid off. Effective APRs sometimes exceed 30–50%.

Credit Requirements and Eligibility

• Line of Credit: Requires a good business credit score, a proven track record, and often collateral.
• MCA: Approval is based mainly on revenue and sales volume, making it accessible to businesses with weaker credit histories.

Impact on Cash Flow

• Line of Credit: Repayments are usually monthly and predictable, helping with budgeting.
• MCA: Daily or weekly deductions are tied to sales, which can strain cash flow during slow months.

Comparison Table: Business Line of Credit vs Merchant Cash Advance

A business line of credit and a merchant cash advance both provide valuable access to working capital, but they suit different financial profiles. A line of credit typically has tighter approval criteria and lower approval amounts compared to a loan or an MCA. It’s also more closely managed while outstanding, meaning businesses need to maintain stronger financial discipline and consistent performance. However, it offers more efficient pricing if you plan to pay down the line during periods when additional liquidity isn’t required.

How to Decide Between a Line of Credit and an MCA: Which Option Fits Your Business Needs?

The choice between a line of credit and an MCA depends on your business’s cash flow, industry, and long-term goals.

When a Business Line of Credit Is the Better Choice:

• You have steady revenue and predictable cash flow.
• You need financing for recurring expenses such as inventory or payroll.
• You want to build your business credit history.
• You can wait longer for the approval process.

When a Merchant Cash Advance Makes Sense:

• Your business is seasonal or has fluctuating income.
• You need immediate funding (e.g., to repair equipment or launch a campaign).
• You struggle to qualify for traditional loans due to credit challenges.
• You run a business with high credit card transaction volume, such as retail, restaurants, or e-commerce.

Example: A Canadian restaurant that sees most of its revenue in the summer may use an MCA to cover staff wages and marketing during peak season. Meanwhile, a manufacturing company with steady contracts might rely on a line of credit to finance raw materials at predictable costs.

Alternatives to Consider

If neither a line of credit nor a merchant cash advance feels like the right fit, other financing solutions may be more appropriate:

• Small Business Loan: A lump-sum loan with fixed repayment terms and lower interest rates, but stricter requirements.
• Equipment Financing: Tailored loans for purchasing or upgrading equipment, often with flexible repayment options.
• Business Credit Cards: Quick access to credit for smaller expenses, though interest rates can exceed 19–22%.
• Invoice Financing: Advances against outstanding invoices to smooth out cash flow.

Quick Comparison of Alternatives

Conclusion: Business Line of Credit or MCA — What’s Better?

Both a business line of credit and a merchant cash advance can serve distinct financing needs.

A business line of credit is best for financially disciplined businesses that can meet tighter approval standards and manage liquidity strategically. It offers efficient pricing, as you pay only when the funds are in use, and provides flexibility for short-term cash flow management.

A merchant cash advance delivers speed and accessibility for businesses that need immediate working capital or have fluctuating revenues. Repayments adjust with sales, offering convenience but typically over a shorter term and with less flexibility to reduce outstanding balances early.

FAQ About Business Line of Credit vs Merchant Cash Advance

At Greenbox Capital, we specialize in flexible small business funding, including lines of credit and merchant cash advances. Our team will help you evaluate your options and choose the solution that best supports your goals.

Contact Greenbox Capital today to explore your financing options and get the funding your business needs to grow.