Business Loan Vs Merchant Cash Advance. Which One is Best?
When the time comes to seek extra funding for your business’s, you get caught in a tight spot between two options: a small business loan or merchant cash advance. While both can serve whatever purpose you intend, you should learn their differences and what to choose when.
These are loans meant for businesses and not individuals. And just like other loans, they have a set interest rate and fixed term. Business loans are the original well known source of supplementary funding for many good reasons:
- Fixed loan terms: you’re sure exactly when you should make your final repayment– and when you’ll have extra cash
- Low Costs: loans are way cheaper than cash advances, with single-figure interest rate.
- Predictability: with a fixed monthly repayment plan, you can easily budget and plan.
- Flexibility: most allow for early repayment, which saves you from paying hefty interests, though beware of the penalties that come with early payment
However, business loans also have some cons. The main one is passing the eligibility test: your company must have a reasonably good FICO score to qualify with banks are stricter than modern lenders. Their Fixed repayment plan also has a shortcoming— you have to make them even when you’re experiencing a slow sales season. But generally, business loans are a great way to gain business funding.
Merchant cash advances
A merchant cash advance, on the hand, is a very different financing solution: in essence, the financing company buys a portion of your company’s future credit card sales by offering you money in advance which they later reclaiming as a percentage of your credit card sales. Thus, there are no fixed terms for repaying cash advances: you basically agree on the amount and the percentage to be deducted off your sales upfront.
This percentage is taken until you’ve pay back the capital and agreed-upon fee. Therefore, if you get a merchant cash advance, a lower percentage doesn’t mean a lower borrowing cost, and this figure isn’t an equivalent of an interest rate.
- Acceptance: all businesses are liable even those with poor credit and financial histories.
• Repayment depends on sales: unlike loans where you have to pay monthly.
• No fixed repayment schedule: the financing company simply deducts its percentage until you clear your debt.
- It’s a very expensive way to seek commercial finance
- Has a sky-high APR.
- Nature of repayments makes budgeting difficult
Now that you can tell the difference between business loans and merchant cash advances, you can choose the commercial finance option that suits you best at that particular time depending on the status of your business.
Business Funding expert, Nathan Hale, founded First American Merchant with his eyes set on helping the backbone of our country, small business owners. His passions include writing/producing music, and travel. First American Merchant is America’s Best merchant cash advance company, serving both traditional and high-risk Businesses.