Merchant Cash Advance vs. Business Loan

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If you  need of an injection of capital for your small business, both a merchant cash advance (MCA) and business loan may be viable possibilities. Despite both options offering similar funds, their costs, qualifications, and borrowing methods are significantly different.

This article describes somekeydifferences between these two products and explainswhen you should choose one over the other.


What Is a Merchant Cash Advance?


This type of funding essentially buysa specified amount  of your future account receivables. The funder will fix a factor rate, whichgoes up to 1.5 times the funding amount.

The purchased receivables are collected over a period of up to 18 months and delivered to the funder with a percentage of your daily cash receipts, which is usually expressed as a specified daily amount. As such, the amount of your everyday profits isn’t important as long as you repay the full amount in due time.

Withan MCA, you can receive a lump-sum ranging from $5,000 all the way up to $500,000. However, it can’texceed one-half of your yearly cash revenue from operations.

When Should You Opt for a Merchant Cash Advance?

A merchant cash advance is a great option if your business doesn’t have a long operating history or consistent cash flowor if the business requires funding very quickly.Funders can typically fund a merchant cash advance in 24 or 48 hours after a qualified  application is completed and submitted.

Think about merchant cash advance if:

  • Your business requires funding quickly: Once a qualified application is completed and submitted, a funder is able to complete its underwriting of the funding and advance the required funds within 24 to 48 hours.
  • Your profits are seasonal: If yourbusiness has high revenue during a certain part of the year and less during other months, an MCA may providea better solution.
  • You want your credit report intact: Since credit reports usually don’t include MCAs, you can safely repair your credit standing for future funding transactions.


What Are the Requirements for a Merchant Cash Advance?

The most important requirementto qualify for an MCA is the amount of your annual sales. The history of the collection of your accounts receivablewill determine if you’re a safe bet for an MCA and the amount that the funder is willing to advance.

The typical MCA qualification parameters are:

  • Credit score: Should be at least 500
  • History of business: Should be active for at least 6 months at the time of application
  • Monthly revenue: Minimum of $15,000

How Much Does a Merchant Cash Advance Cost?

There are two important metrics that you should consider when opting for a merchant cash advance – the factor rate and the specified daily—or in some cases, weekly–amount.

The factor rate is a percentage of the funding amount.  When applied to the funding amount, it equalsthe amount of your accounts receivable that the funder purchases in the MCA transaction.  This rate usually ranges between 1.2%and 1.5%, depending on the repayment length and the funding amount. So, if you receive a cash advance of $100,000 and your factor rate is 1.5, the funder has purchased a total of $150,000 of your future accounts receivable.

The specified daily amount is the amount of money that the funder  will take from your collectionsof the accounts receivable that the funder has purchased.This is usually accomplished by ACH debits to your bank account that have been authorized by you.  The actual specified daily amount varies depending on your daily sales,but typically represents between approximately8% and 30% of your average daily cash receipts over the past six months.

So, even if your business needs a quick injection of capital and an MCA is easier to get, keep in mind that the repayment costsare higher and  payments are made on a day-to-day basis. If you don’t think it through thoroughly, it may leave your business in even worse financial position.However, if your business or you havesuffered some financial difficulties in the past which have affected its credit score negatively, an MCA could nevertheless be available.


What Is a Business Loan?

A small business loan works similar to a bank loan or mortgage. You borrow a fixed amount of money from  a lender and you agree to repay the amount borrowed, plus the agreed-upon rate of interest on that amount, on a periodic basis.    Depending on the deal,repayments may be daily, weekly, monthly or quarterly, or repayment could be due only at the maturity date.  Interest rates on these loans could be as low as 10%, or less, depending on the financial condition and cash flow of your business.

Small business loans always have a fixed maturity date.  This is the due date by which you need to repay the loan and all unpaid interest in full. Depending on certain factors, the amount of a small business loan ranges from $5,000 to $500,000.

Small business loans generally require significant documentation and the funder generally requires substantially more time to underwrite, approve and fund the loan than an MCA funder.

When Should You Decide on a Business Loan?

If you have stable annual revenue and a solid credit score, and are considering a small business loan, you should know that the overall fees of a small business loan are much lower than the costs associated with an MCA transaction. The lower cost of a small business loan may thereforeprovide you with a safer financing alternative.

Think about a business loan if:

  • You need a larger amount of funds: With an MCA, your funding depends on the percentage of your average daily cash receipts. However, business loans can offer more capital due to longer repayment dates. Some small business loans may offer 25-year repayment plans.
  • You have a successful business: If your business has been turning profit and producing significant cash steadily for some time, you may be able to strike a great loan deal.
  • You like consistency: The possibility to predict all your costs helps you plan your monthly budget.
  • You have a good credit score: If you have a minimum credit score of 640 with no recent negative reports such as bankruptcy.

What Are Business Loan Requirements?

You need to meet three necessary requirements to be eligible for a business loan:

  • Credit score: Should be at least 600
  • History of business: At least one year of operations at the time of application
  • Yearly revenue: Minimum of $100,000

How Much Does a Business Loan Cost?

If you have excellent business results, some lenders may offer you an interest rate as low as 9%.

There are also two more rates to consider:

  • Origination fee: The amount that you pay upfront, ranging from 1% to 5% of the amount borrowed.
  • Prepayment Penalty: If you repay the loan before the maturity date, you may be required to pay a penalty ranging from 1% to 5% of the amount of the repayment


The Final Verdict

An MCA is much better for business with fluctuating revenue and that requires funding very quickly. It’s also much easier to qualify foran MCA because your credit score usually isn’t a determining factor.

On the other hand, if you  have an established business with consistent balances, a business loan could be a better and less costly option. To qualify for a business loan, however, you will have to meet much stricter eligibility requirements, which not many businesses can do in this tough economic climate, and you will have to engage in a lengthy due diligence and documentation process.

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