3 Key Differences Between a Small Business Loan and a Merchant Cash Advance

In the vast landscape of business financing, the choice of fund sourcing is integral to a venture’s prosperity, whether it’s a budding start-up or an established enterprise. The funding domain might seem intricate and labyrinthine at first glance, but with the right information and guidance, it can be traversed without significant hurdles. Two common financing methods that many businesses consider are small business loans and merchant cash advances, often categorized under the umbrella term of business cash advance loans. While they both aim to provide businesses with the necessary capital, their methodologies, terms, and conditions are distinctly different.

1) Fund Provision Methodology

The standard small business loan, provided by banks or other lending institutions, works in a straightforward way. The business applies for a specific sum, which if approved, they receive and then gradually pay back over a predetermined period, inclusive of interest. These loans frequently require the business to offer collateral, such as business assets or inventory, and typically involve an extensive approval process which may include rigorous credit checks.

Conversely, a merchant cash advance is an alternative within the domain of business cash advance loans, where a company agrees to sell a portion of its future credit card sales for a lump sum of money upfront. The MCA provider then recoups this advance by taking a set percentage from the business’s daily or weekly credit card sales until the initially advanced amount, plus an agreed-upon fee, is fully repaid.

2) Divergent Repayment Structures

A crucial differentiation between these two financing options lies in the structure of their repayment processes.

• Small Business Loan: With this option, a fixed repayment timeline is established, generally on a monthly basis. The payment amount, which consists of both the principal and the interest, remains constant throughout the loan tenure, unless late fees are incurred or interest rates are adjusted.
• Merchant Cash Advance: In the case of an MCA, the repayment amount varies based on your credit card sales. During lean business periods, your repayment decreases, but during high-volume sales periods, the repayment proportionately increases. This dynamic repayment plan can offer a lifeline to businesses that experience substantial variability in their sales.

3) Varying Eligibility Criteria

The qualifying requirements for these two types of funding are not identical either.

To qualify for a small business loan, there are stringent eligibility requirements. The lender will thoroughly assess the business’s credit rating, its financial history, profitability, and in some instances, the personal credit of the business owners. In contrast, MCAs are less concerned with credit history and focus more on the volume of the business’s daily credit card sales. This approach makes MCAs a potentially viable funding option for businesses with robust sales volume, even if their credit history might not be as strong.

Small business loans and merchant cash advances, though both provide much-needed capital to businesses, do so through different modalities. The former entails a traditional loan with a fixed repayment scheme, while the latter offers a flexible cash advance based on future sales. Understanding these distinctions helps you choose the best financing solution for your company. Remember, making the right financial decision can be instrumental in fostering your business’s growth trajectory and future success.