Merchant Cash Advances vs. Business Loans

As small business owner looking for working capital, how do you know whether a business loan or a merchant cash advance is the best financing option for your business. Either one can be utilized to for an array of business expenses: marketing campaigns, new equipment or operating expenses to mention a few. Perhaps one of the key differences between a MCA and a business loan is that MCA’s offer more flexibility in terms of eligibility whereas business loans have more favorable fees. Our experts at discuss the merits of each and provide insight on how they can harm and help your business.

What are business loans?

Like all loans, small business loans are sought out by entrepreneurs to lift the financial burden of starting a company. The repayment structure and how much you pay each month is governed by the interest rate and  duration of loan.

Some of the selling points of business loans include:

  • Option to pay back sooner. The sooner you pay back your business loan, the more you save on interest.
  • Specified repayment amount. Knowing exactly how much you are required to pay back each month allows business owners to budget accordingly.
  • Fixed repayment term. Many entrepreneurs would rather know how long the loan will reflect on their books.
  • Lower overall cost. With interest rates being lower than 8.25 percent through the SBA, the overall cost of obtaining a business loan makes it a top contender in the lending arena.

Drawbacks of business loans include:

  • Stringent eligibility requirements.
  • Strong credit scores
  • No leeway for months with slower sales.

Merchant Cash Advances

Merchant cash advances is different from a business loan in that the lender pre-purchases some of the credit card sales – essentially advancing the funds to the business. In actual fact, the lender has ownership of the future.

Merchant cash advances, unlike loans, do not have a set repayment period or an interest rate. The payment structure is set up so that the lender gets repaid based on percentage of your credit card sales until the principal amount as well as the fee has been satisfied. The percentage of sales amount is often mistaken as the interest rate. As such many borrowers are mislead into thinking that a lower percentage of sales means a low cost to take a cash advance.

Advantages of Merchant Cash Advances

  • Less strict approval criteria.
  • Repayment is based on sales.
  • No fixed repayment term.

Disadvantages of Merchant Cash Advances

  • Inability to budget accurately.
  • Less control over your payment processor.
  • Less regulation to protect borrowers.

Which is better?

It depends largely on your business. If you are able to obtain a loan with a low interest rate, it may be your best option. If you find yourself in the unfortunate position of not being able to obtain a favorable interest rate, an advance  may be a good option for you.