Not all the time during the year you can do great deals that give you all the cash flow you would need to be successful and grow. There are times when you may be in dire need of funds just to keep your doors open or even expand.

As a business, your best option would be to opt for a merchant cash advance or business loan. However, it is always best to understand both thoroughly before you go out and apply for one.

Cash advance for merchants

A merchant cash advance (MCA) is a cash advance that is given to you in advance in exchange for a certain percentage of your credit card sales volume, until the full amount has been paid. This is best for a business like a restaurant or retail store that does a lot of credit card sales on a daily basis.

Business loan

A business loan (BL) is one that offers you cash up front in exchange for monthly payments of fixed installments over an agreed period of time. The terms in this case are quite flexible and you can choose what works best for your business.

Differences between merchant cash advances and business loans

Although both options work well for businesses, they differ from each other when it comes to the following:

Credit structure

While a business loan is legally considered a loan, an MCA is not. The former is generally subject to certain limitations and must be reviewed by federal authorities before being approved. You may need to examine the qualifications banks or lenders are looking for to approve such loans. You will need financial statements that are at least two to three years old and a good credit report to get started. Also, it may take a while to get your loan approved in the case of a BL. However, the MCA is easy to pass without a lot of formalities.

The approval process

The approval process is quite liberal for merchant cash advances compared to business loans. All you need to prove is that you have a good volume of credit card sales transactions. Even a statement of six months or a year should be sufficient. It doesn’t matter what your credit report looks like. Approval is almost instantaneous and within two to three business days you should have the amount with you.

Business loans, on the other hand, require a great deal of stuff for approval. Lenders examine your cash flow reports, credit reports, financial statements, and industry metrics before deciding whether or not you are worth the loan. After analyzing the risk factor, they determine the interest rate that they are going to charge you.

Financing speed

Although this may differ from lender to lender, MCAs are generally approved faster than BLs. However, you may have to do your research on this before opting for one. Make a short list of a few lenders and find out how long it takes to approve your loan, provided you have all the documents in place. This should give you an idea of ​​which one would be best for your business.

The payment process

Unlike BLs, where you have to pay a fixed amount each month (including interest) for a certain period of time, MCAs take a completely different route. The moment there is a credit card sale transaction at your POS, a certain percentage of the invoiced amount is automatically credited to the lender’s account. This does not affect your operating expenses in any way. Also, it doesn’t matter how much money you pay every day. It all depends on the type of business you get. Considering the ease of payment, an MCA can definitely be a better option.

Interest rates

Interest rates are generally defined and published in the case of business loans. The rate could even change after the initial time period. Unlike BLs, Merchant Cash Advance Funding would carry a higher interest rate, although it is not actually published.

Other costs

Business loans are fairly transparent when it comes to costs. They do not imply additional charges to those mentioned. However, MCAs include many other costs, such as setup fees, payment fees, and processing fees, which can even amount to more than the actual loan itself.

Both loans have their own pros and cons. The best option depends entirely on your business and your financial situation. If you think you will be able to pay a fixed amount each month, regardless of how much money you make, a BL would be ideal for you. However, if you are not comfortable paying your operating expenses, you should opt for an MCA.

Yes, the costs and interest rates are definitely higher in the case of MCAs; but you may not feel the need to pay for them. Also, in emergencies, MCAs can be very helpful as they are approved and processed fairly quickly. For businesses that don’t have as good a credit report, an MCA might be the only answer.