Merchant Cash Advance V/S Business Loan : Which is Better

Loans and short-term credits are inseparable parts of any business irrespective of its size. Whether you want to expand the existing business or venture into a whole new horizon altogether, you cannot go without taking funds from an outsider lending body.

If you fall in the range of small to medium-sized firm then there are two main kinds of financing sources that can really come handy, one is business loan and the other is merchant cash advance.

We will delve into both and gauge the importance, pros and cons of both the alternatives of financing.

What is a Business Loan?

Business loan, as the name suggests, deals with an arrangement where a fixed amount of money is lent out by a lender. In return for this, the borrower needs to pay back the lender a fixed amount of money as a repayment. Business loans  have two important features, one is “fixed maturity date” and the other one is “fixed monthly payments”. The amount of money to be repaid depends upon the rate of interest fixed by the lender. This can be either secured or unsecured depending on the amount and credit history of the borrower.

What is a Merchant Cash Advance?

It is an advance given to business owners, especially the ones who are dealing with credit cards for procuring their money from customers. So, under this type of funding, the advance is lent out to meet the daily expenses (which are majorly known as working capital expenses) of the business. In this type of financial funding, the lenders buy a certain percentage of the would-be-sales-via-credit-card from the business. There is no fixed rate of interest or fixed maturity date to repay the loan. Repayment is done from the sales amount via credit card swipes.

Advantages of Taking a Business Loan

1. Lower overall cost: Interest rates as well as commission and processing fees are in a lesser range.

2. Fixed repayment amount: The rate of interest is fixed when it comes to business loans. So, the borrower can be clear about how much he needs to set aside for the purpose of repaying back the amount.

3. Option of early repayment: One advantage of this option of funding is this provides an early repayment option and thus you can save your future interest payments by paying off the loan amount as early as possible.

4. Specified repayment terms: Repayment terms are all well-defined in advance and that surely helps the borrowers to plan their business expenditures and budgets.

5. Multiple loan options: There are different kinds of loan options available under business loan. The borrower can choose wisely after being sure of his requirements of business. He may choose a smaller range or a larger one depending upon his business needs as well as rates of interest offered to him.

Advantages of Taking a Merchant Cash Advance

1. No collateral required: It is based on future credit card sales of the business. So no collateral is required for getting MCA.

2. Fast access to capital: The lenders give away the whole amount borrowed as advance to the business owners against the future credit card sales. Thus, the business gets the capital well in advance and quickly, almost within a week or two.

3. Repayment based on sales: If the business is able to generate sales (in credit) then the advance taken is automatically paid back. In the months of lower sales, payback amount will be less too. This helps the business to grow as the owners are not forced to pay back a certain fixed amount irrespective of revenue generated.

When to Consider Taking a Business Loan?

1. You have a good credit history: The first pre-requisite to get the approval for business loan  is a positive looking credit history without any defaults or any history of escaping of tax.

2. You require a large amount of capital: In case you are looking for a large amount of funding to grow your business, then business loan is the first go-to-option. Most of the time your loan needs to be backed by some collateral asset owned by the business. Generally, a collaterally backed loan can go up as high as one crore.

3. There is the requirement of stable repayment terms: If you want to be assured about exactly how much amount you need to give away as repayment and at what intervals, then business loan is the best possible option. There will be no fluctuations in repayment terms under this kind of funding.

When to Consider Taking a Merchant Cash Advance?

1. Idea for seasonal businesses: Seasonal business which earns good revenue during a particular season and sees a drop in its sales post that season should go for a MCA. Because it does not create any pressure on the business to repay back when it is not gaining much revenues.

2. You don’t want a loan on your credit report: Merchant cash advance tends to evaluate the sales history (via credit card) of a business more than personal credit history. Therefore, if you do not want a loan based on your credit report or collateral, then this is the best option available.

3. If you are an online merchant:“A good cash inflow” and “a high volume of sales coming via credit cards” these are the two important criteria to avail MCA.Online merchants tick off these two boxes and so if you are an online merchant then MCA is a good alternative.

Conclusion

Choosing the right kind of loan to fund a business is a crucial element for the future of the business. As it affects multiple areas of business like, budgeting, expenditures, profits and long term growth plans. Time to get the loan is also an important factor here. So, the option should be evaluated thoroughly looking at both advantages as well as disadvantages of both the lending options.