Differences Between Merchant Cash Advances and Business Loans

MCA vs. business loans
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Financing is the lifeblood of businesses, helping them grow and stay stable in the busy world of commerce. Whether it’s expanding, buying new things, or dealing with unexpected costs, having stable access to a stream of money available is always important.

When it comes to getting money for your business, there are lots of options, and two common ones are called merchant cash advances (MCAs) and small business loans (SBLs).

Understanding Small Business Loans (SBL)

Small business loans are important when it comes to getting money for your business, and come in different types, like term loans, SBA loans, SMB loans, and business lines of credit. They entail receiving a specified sum repayable over time, typically with interest.

To get a small business loan, you usually need to meet certain requirements. This can include having a good credit score, a detailed business plan, and sometimes something valuable to put up as collateral. The process can take a while, because lenders want to make sure you’ll be able to pay them back.

Types of Small Business Loans

  • Term Loans: These are the most common type of small business loan. You borrow a certain amount of money, and pay it back over a set time with either a fixed or variable interest rate. You can use term loans for many purposes, such as growing your business, buying equipment, or covering everyday costs.
  • SBA Loans: Governed by governmental backing, these loans offer favourable terms and lower interest rates, making them accessible to small businesses.
  • Business Lines of Credit: Functioning akin to business credit cards, these provide a reserve of funds available for immediate use, with interest incurred solely on utilized amounts. They prove beneficial for cash flow management and addressing short-term financial needs.

Exploring Merchant Cash Advances (MCA)

What does cash advance mean? Merchant business cash advances are a different way to get money for your business. When it comes to the cash advance definition of getting a lump sum of money to pay back over time, you get an upfront amount in exchange for a percentage of your future credit card sales.

This can be helpful if your business has ups and downs in sales, because you pay back less when you’re making less money. It provides flexibility in managing payments, alleviating concerns about fixed monthly obligations.

Comparing Repayment Structures

The manner in which businesses reimburse funds obtained through small business loans (SBLs) and merchant cash advances (MCA loans) can significantly impact their cash flow dynamics.

Repayment Aspect SBLs MCAs
Repayment Strategy Fixed monthly payments Percentage of future sales
Impact on Cash Flow Predictable Varied, tied to sales
Interest vs. Factor Rates Interest rates Factor rates

When you have an SBL, you pay the same amount every month. This makes it easier to plan your finances because you know exactly how much money you’ll need to set aside each time.

On the other hand, with merchant cash advances (MCAs), your payments are based on how much money your business makes from sales – if your sales are high, you’ll pay back more, and if they’re low, you’ll pay back less. This flexibility offers adaptability, but poses challenges in accurately forecasting monthly repayment obligations.

Interest vs. Factor Rates

When it comes to differences between merchant cash advances and small business loans, merchant cash advances and small business loans diverge notably in their interest and factor rate mechanisms. Small business loans accrue interest solely on the borrowed amount, transparently reflected in monthly payments.

However, merchant loans employ factor rates, incorporating not only interest but also additional fees and charges. This broader inclusion complicates cost comparisons between SBLs and MCAs, as factor rates encompass more than just interest.

Analyzing the Costs of Financing

Understanding how much it costs to borrow money is crucial when deciding between small business loans (SBLs) and merchant funding.

With small business loans (SBLs), you usually pay interest on the amount of money you borrowed and the time you borrowed it for. For example, if you borrowed $50,000 with a 10% interest rate for five years, you’d end up paying $12,500 in interest. That means you’d have to pay back a total of $62,500.

Meanwhile, merchant cash advances (MCAs) use something called factor rates to figure out how much you’ll pay back. Factor rates include not just interest, but also other fees and charges – for instance, if you got a $50,000 MCA with a factor rate of 1.2, you’d have to pay back $60,000, no matter how long it takes.

Even though SBLs might have lower interest rates than MCAs, the total cost of borrowing can be very different because of the terms, rates, and fees involved. Hence, meticulous assessment of total expenses is imperative to align with financial objectives.

Application Process and Speed of Funding

The process and requirements for obtaining funds via SBLs or MCAs diverge in terms of duration and paperwork.

Securing small business loans typically involves furnishing numerous documents such as financial statements, tax returns, and business plans. It can take a few weeks to a few months to get approved; however, with merchant cash advances (MCAs), the process is much faster and needs less paperwork. You can often get the money within just a few days after getting approved.

Impact on Credit and Collateral Requirements

When it comes to getting money for their businesses, entrepreneurs need to think about their credit and what they can put up as collateral.

For small business loans (SBLs), getting an SBL usually means having a good credit score and maybe giving something valuable as collateral, like property or equipment. Lenders look at your credit history and business finances to decide if you’re a good bet to pay them back.

Having a solid credit history and assets to put up can help you get an SBL with good interest rates, but if you’re just starting out or don’t have much to offer as collateral, it can be tough to qualify.

On the other hand, with merchant cash advances (MCAs), your personal credit score isn’t as important, and you usually don’t need to give any collateral. Instead, MCA providers evaluate business sales performance and future revenue projections. This streamlined approach facilitates funding for businesses with less-than-optimal credit or limited assets, leveraging sales as the primary determinant.

However, it’s essential to recognize the difference between cash advance and loan: MCAs typically entail higher fees and interest rates compared to SBLs. Therefore, while they’re more accessible, they can end up costing more in the long run. Entrepreneurs need to think about whether the ease of getting money quickly is worth paying more for it.

Suitability for Different Business Needs

Selecting the optimal financing method for your business hinges on various factors, including your business type, revenue stability, and financial objectives.

A business loan for small business is ideal for enterprises with consistent income streams seeking funding for substantial, long-term initiatives. Whether it’s expansion endeavours, equipment acquisitions, or marketing endeavours, SBLs provide the necessary capital for gradual growth. Moreover, they often boast favourable interest rates and transparent repayment terms, facilitating credit score enhancement.

Meanwhile, merchant finance loans offer advantages to businesses experiencing revenue fluctuations or requiring immediate capital infusion. MCAs enable repayment based on sales revenue, accommodating income variability. This feature proves invaluable for businesses susceptible to demand fluctuations or encountering short-term financial constraints.

However, it’s crucial to acknowledge that while MCAs offer accessibility and lenient credit requirements, they may incur higher costs over time. Thus, entrepreneurs must weigh the benefits of rapid access to funds against the potential long-term financial implications. Careful consideration of business loan calculators and willingness to pay for expediency is essential in making an informed decision tailored to business needs.

Ready to Explore Your Financing Options?

When it comes to getting money for your business, choosing between a loan vs advance is important. Each one has its own good points and bad points, so you need to think carefully about what’s best for your business’s money situation and goals.

If you’re ready to find out more about small business loans vs merchant cash advances, why not get in touch with Greenbox Capital? We offer flexible funding solutions that can be tailored to fit your business’s needs.

Whether you’re looking to apply for small business loans or MCAs, expand, or just need a bit of extra cash, Greenbox Capital could have the right solution for you.

Jordan Fein
Author: Jordan Fein
Contributor and expert in finance and loans, business and economics