The Differences Between Merchant Cash Advances and Business Loans

By: Jilly Pretzel

Sometimes, small businesses need big working capitol—and need it fast. Maybe the rent is due or perhaps the owners need some extra capitol to make payroll during an extra slow month.

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If you own a small business and are in need of some fast working capital, you might be looking at either a Merchant Cash Advance (MCA) or a Business Loan. Though both can bring in some fast cash for your business, you might be wondering how the two differ, and which is better for your company.

Here are the top four differences between Merchant Cash Advances and business loans… and how that will affect your choice.

1. Rates

Plenty of business owners will probably say the most important part of a loan is the rate.
A business loan works just like mortgage in that a lender loans you an amount which you pay back in regular, fixed payments. The rates for a business loan can vary, but it could go as low as around 7 percent and as high as 60 percent.

Be aware that only prime borrowers get the lowest rates, standard borrowers should expect to be around 40 percent.

Meanwhile, a merchant cash advance is, well, not actually a loan. Providers don’t exactly “loan” you money. Instead, they purchase your future credit card receivables at a discount. So, you’d get a lump sum up front and pay it back with a percentage of your daily credit/debit receipts.

So, merchant cash advances charge a “factor rate” and collect a “holdback percentage.” The factor rate is the amount you’ll pay to the provider over the life of the advance, for example, if your factor rate is 1.19, you’ll pay back the lump sum plus 19 percent. If you borrow $100,000, you’ll need to pay back $119,000.

This is collected through your holdback percentage, the percentage that is taken out of you credit/debit card sales. While that holdback percentage is a constant number throughout the life of the advance, since you’ll have different sales every day, that payment will be different every day too.

MCAs may be more flexible when it comes to paying them back, which can mean less financial burden when it’s most important. However, rates for MCA can be much higher than business loans, usually hovering around 80 percent to 120 percent.

2. Maturity Rate

Because a business loan has a fixed rate (and requires regular payments) the maturity date is fixed too. Again, think of this like a car loan or a mortgage. You know when you buy a house (or a car) when it’ll be paid off if all.

That is, as long as everything goes according to plan.

However, when it comes to MCAs, there is no fixed date for paying it back. This can leave room for flexibility and provide less of a financial burden during difficult seasons.

3. Qualifications

While rates and maturity dates may be important aspects to consider, none of that matters if you can’t even get the loan in the first place. When it comes to business loans and MCAs, you need to know what qualifications they need.

Typically, a business loan lender will look at three major factors in an application: annual business revenue, time in business, and your personal credit score. When it comes to credit score, applicants should have (at the very least) a 500, but the higher the better!

For MCAs, the qualifications are less about overall performance and more about credit card sales, though the credit score of the business owner will be considered too. An average applicant should have at least 5k (and more) sales a month, should have at least three to six months in business, and the owner should have a credit score of at least 500.

4. Better for Different Businesses

There are so many differences between business loans and MCAs, which means your business will probably do better with one or the other.

A business loan is usually better for a more established, profitable business, while a merchant cash advance is usually thought to be better for seasonal businesses or businesses that have a high volume of credit card sales.

MCA is great for a seasonal business because the amount repaid will vary. It will lower when the business is making less and go higher when making more. So, if a business has a low season, borrowers don’t have to struggle to pay a fixed amount.

MCAs are also good for online merchants and businesses who do a lot of credit card sales. This is because businesses can get a larger advance amount in return for a small portion of their credit card receipts.

On that note, if your business receives cash or check mostly, this is not ideal.