Financial Advice May 13, 2022

Merchant Cash Advance Vs. Business Loan, Which One is Right for Your Business?

Finding the right options to obtain capital for your business is complex and can depend greatly on your unique business plan and situation. Two very common ways to get financing for your business are a loan or merchant cash advance. You may need to do a little reading to understand each – and which one is right for you.

Below you’ll find easy-to-read explanations of both options, their differences, their similarities, and the benefits associated with each!

Business Loan

A lender agrees to give a business owner a set amount of capital upfront, and that capital will be paid off in monthly instalments over time. The loan will be subject to interest, which can vary in percentage, but will always make payments more expensive.

Typically, the business owner will pay a set amount based on the loan amount and interest percentage each month until the loan is paid. Should things begin to take off, the business owner can always decide to pay more or pay it off in full.

Merchant Cash Advance

A lender agrees to give a business owner a set amount of capital upfront with the promise of future repayment. This is a similarity between merchant cash advances and loans.

The main deviation is in how that capital will be paid back. 

In a merchant cash advance, the business will pay a percentage of their credit card sales per month that will go toward the repayment of the capital borrowed.

Rather than agreeing on a set payment each month, a cash advance will take an agreed-upon percentage of credit card sales made that month. Merchant cash advances can be applied easily through certain online lenders. Merchant cash advances, similar to loans, are still subject to interest. Some even have helpful blog posts like this article on exactly what you need for approval.

Which to Choose?

Both options are used frequently by businesspeople. In a merchant cash advance, you pay a percentage of what you make in sales, which can help businesses who make money in the form of consumable goods or services. Merchant cash advances can help small businesses quickly reinvest in themselves and bring in even greater revenue.

If a company is not yet making sales, it’s likely safer to choose a traditional business loan. If there are no credit card sales, the merchant cash advance will not work and may leave the company in a tough position if they are unable to repay their set percent per month. This article goes into further detail on the pros and cons of the MCA.

However, for any business that has regular credit sale transactions and an established customer base, the merchant cash advance is much more attractive as it ensures a payment you’ll be comfortable with because they are based on your sales. This can be a much better option than a traditional loan for businesses that have steady cash flow via sales!

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