Which Is Right For Your Business: A Loan Or A Cash Advance?

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Whether you’re starting a business from scratch, or trying to grow an existing one, the need for cash to fund your ideas and strategies, will likely be ever present. While you might automatically consider applying for a line of business credit or a bank loan, if your business is small scale, you might also want to consider something known as a merchant cash advance. 

To help you determine whether business loans for women or a cash advance would best suit your needs, let’s look at both options in a little more detail:

What is the difference between a small business loan and an MCA?

Where merchant cash advances are concerned, the business in question receives an advance cash sum from the provider, who then goes on to draw funds from the businesses future credit card sales as repayment. Depending on the specific contract between the business and the provider, payments can be made on a daily or weekly basis, and are based upon daily credit card sales percentages, known as the holdback; typically ranging from 10% to 20%. 

The factor, or buy rate, which is basically the cost of the advance, is a figure that is preset and typically expressed as a figure like 1.2 or 1.4. 

Which would be best in terms of cost?

It’s often tricky to compare the cost of a merchant cash advance with a small business loan due to the way in which they are priced, but there are a few factors you can consider that might make things a little clearer. 

Cash advances charge the merchant interest based upon the total upfront amount, compared to loans that charge interest on smaller amounts every month while the principal is being paid off. 

As a form of short-term financing, merchant cash advances are better matched for businesses that have short-term needs. Most advances must be repaid in full between 6 to 24 months, and unlike the majority of loans, paying an advance off early will not provide a business with any savings, as the factor rate remains the same no matter how long it takes to pay it back. 

With no fixed monthly payments, a cash advance means that a business can pay more during periods when sales are up, and less when they are down, helping them avoid a cash crunch such as that which might occur for seasonal businesses when tied into fixed monthly payments. 

What are the main differences between the two?

The biggest and most important differences between a business loan and a merchant cash advance are listed below:

  • The speed at which funds can be gained – once applied for, a cash advance may deposit funds into your business account within 24 hours, whereas approval for a loan can take much longer, sometimes weeks.
  • Limits on borrowing – some loans can approve borrowing amounts of up to $5 million, whereas merchant cash advances are able to provide businesses with amounts ranging from a few thousand dollars, to around $250,000, sometimes more. To find out how much you could gain from a cash advance and what it might cost you, try using an online MCA Calculator.
  • Requirements of the borrower – credit scores aren’t important when it comes to merchant cash advances, but business loans usually require that the owner of the business has a personal credit score of no less than 700. In addition, the business owner may need to provide a personal guarantee for the loan and extra collateral. 

What is the best option for your business?

While there’s no doubt that an MCA gives you quicker access to cash, and a lower credit score is acceptable when applying for one, they can end up costing a business considerably more than a loan. 

Ultimately, deciding upon either a loan or an MCA will rest upon factors specific to your business, and your needs, but the decision requires careful consideration and a thorough assessment of the pros and cons of both options.