According to the 2015 Small Business Credit Survey done by Federal Reverse Bank of New York, a traditional bank lending continues to be the number one source of funding for small businesses. Only 20% of merchants prefer online lenders when it comes to borrowing a lot of money. As for microlending, almost 50% of entrepreneurs choose online lenders instead of small and large banks, and different credit unions.
A merchant cash advance and a small business loan are two primary options if you’re in need of capital for your small business. A Bank is a prominent representative of the small business loans, while an online lender offers another option – a merchant cash advance. Since last year an interest in a merchant cash advance has arisen, and online lenders are having a busy time nowadays.
But what are the differences between these two lending solutions? Either a loan or a cash advance may be a good pick, depending on what suits you and your situation best.
How They Work?
A business loan is just as any other type of loan (mortgage, car loan, etc.). A borrower gets access to a required amount of money and pays a fixed sum back monthly (or weekly or daily, depending on the contract). There are fixed payments that are remitted daily or weekly and pay back the amount to a lender.
A merchant cash advance is not a loan per-say; a lender funds you the money in exchange for a percent of your business’ daily credit or debit card receivables. This percent is measured by a factor rate that is usually from 1.12 to 1.56. The exact amount of money that you pay back daily varies from day to day based on your business income. When your business generates more revenue, you pay more, and on less productive days, you pay less. There is no payment end date, though cash advances are mostly paid back up to 12 months. Deductions are made from your sales card daily until the advance is paid back in full.
Below there is a table of the primary differences between a merchant cash advance and a business loan:
|Business Loan||Merchant Cash Advance|
|How it works||Set monthly payment||A percent of credit card sales deducted daily|
|Payment end date||Yes||No|
|Repayment Schedule||Fixed||Depends on company earnings|
|Add to the credit score||Yes||No|
|Approval||Long and hard||Fast and flexible|
What is right for you?
Choosing the right financing option involves knowing your business goals, understanding your income and cash flow, and weighing up the pros and cons. A merchant cash advance can be faster, require less paperwork, and be accessed by businesses with bad credit score and without collateral. However, it can be pricier than a business loan. If you need help studying the advantages and disadvantages of the merchant cash advance and merchant lending, contact 800fund.com today for a free business consultation.