As a general rule of thumb, business loans are the best option if your company needs funding. This is because merchant cash advances (MCAs) are an expensive form of credit that we typically recommend only as a last resort.
However, both MCAs and business loans can be beneficial if used properly. Funds from each of these loan types can be used to help with a company’s expenses, cash flow shortages, daily expenses, and more.
Merchant Cash Advance vs Business Loan: Quick Comparison
With an MCA, your business will receive a lump sum of funds. Repayments are made on a daily basis, with payment amounts calculated as a percentage of your credit card sales.
A business loan can vary in repayment terms and allowable uses. However, you’ll typically receive a lump sum of funds with fixed payments commonly made on a weekly or monthly basis. Business loans can also be structured as a line of credit that allows you to draw funds continuously on an as-needed basis up to a designated credit limit.
MCAs | Business Loans | |
|---|---|---|
Typical Maximum Funding Amount | $200,000–$5 million | $500,000–$5 million |
Estimated Annual Percentage Rate (APR) | 40%–275%-plus | 8%–20% |
Typical Maximum Repayment Term | 12–24 months | Up to 10 years |
Typical Funding Speed | 24–72 hours | 24–72 hours |
See Our Recommended Lenders |
When To Choose an MCA vs a Business Loan
MCA
MCAs are expensive and should only be used if you’ve exhausted all other financing options. However, there are some circumstances where an MCA could be a good option for your business:
- You can’t get approved for a loan: Most business loans have minimum requirements for things like credit scores, annual business revenue, and time in business. Since MCAs have easier qualification requirements, they can be a viable source of funding if you’ve been turned down for financing from other lenders.
- You process a high volume of credit card payments: MCAs are issued and repaid based on your credit card receipts, so you’ll need a sufficiently high volume of payments to get approved by a lender.
- Your business experiences large fluctuations in revenue: Repayment amounts on an MCA can differ based on your daily credit card sales. Most business loans, by comparison, require fixed weekly or monthly payments. As a result, an MCA can be a better fit if you have concerns about not being able to make payments during a period of reduced revenue.
- You’re likely to get a positive return on the money: Since MCAs are one of the most expensive forms of financing, you’ll want to be sure you get a sufficiently high return on the money. In doing so, you should also consider the potential downsides and impacts to your business if you don’t get the financial return you expected.
Business Loan
- You have a credit score above 550: Even with bad credit, it’s possible to get approved for a business loan. Many of our picks of the best business loans for bad credit consider other factors, such as collateral, time in business, and revenue.
- You have no concerns over cash flow or the ability to make fixed payments: Most business loans require a fixed minimum weekly or monthly payment. This amount does not change regardless of your monthly income, expenses, or cash flow.
- You have collateral to pledge for a loan: If you have collateral to pledge for a loan, you can get approved even with bad credit or finances. Pledging collateral for a loan reduces a lender’s risk because it gives it the ability to take possession of the collateral in the event you default on the loan. This reduced risk makes it more likely that a lender will issue financing.
- You need funds quickly: Business loans can have a better likelihood of getting approved and funded in as little as 24 hours. Some lenders even offer same-day funding. If you need money fast, you can see our recommendations for some of the best fast business loans.
Pros & Cons of Merchant Cash Advances vs Business Loans
Merchant Cash Advances
| PROS | CONS |
|---|---|
| Easy qualification requirements | Expensive form of credit that should be considered as a last resort |
| Collateral is not required to qualify | Payments can be adjusted based on volume and amount of credit card sales |
| Fast funding speeds | Loan agreements can be difficult to understand |
| Early repayment yields no savings in fees | |
Business Loans
| PROS | CONS |
|---|---|
| Rates and fees can be very competitive | Required minimum payments cannot typically be lowered |
| Wide range of loan types available to cover different types of business expenses | Eligibility criteria can be strict depending on type of loan you apply for |
| Quick loan approvals and funding speeds offered by many lenders | Some loans may have heavy paperwork or documentation requirements |
| Ability to save on interest and fees with an early loan payoff | |
MCAs vs Business Loans: Qualifications & How They Work
Rates, terms, and qualification requirements will vary depending on the lender and the strength of your credit and finances. However, below are typical figures and ranges you’re likely to see when comparing a merchant cash advance vs a business loan.
Merchant Cash Advance | Business Loan | |
|---|---|---|
Typical Repayment Term | 12–24 months | Up to 10 years |
Typical Repayment Schedule | Daily | Daily, weekly, monthly, seasonal, and deferred |
Personal Guarantee Required? | No | May be required |
Collateral Required? | No | May be required |
Typical Credit Score Required | 500-plus | 620-plus |
Typical Time in Business Required | 6–12 months | 3–6 months |
Typical Annual Revenue Requirement | $60,000-plus | $50,000-plus |
How a Merchant Cash Advance Works
Below is a summary of the steps involved with applying for an MCA, receiving the funds, and repaying the loan. You can learn more about each step in our merchant cash advance guide:
- Find a lender and apply: The first step is to find a lender that issues MCAs and then submit a formal loan application. You can consider banks, credit unions, brokers, and online lenders.
- Provide lender with requested paperwork: Depending on the lender you choose and your business qualifications, required documents can vary. However, this commonly involves financial statements such as tax returns and bank statements.
- Review and accept terms of loan approval: If the lender can issue an MCA approval, you’ll be given a contract with items detailing the rates, fees, repayment terms, and more.
- Complete setup of credit card processing: MCAs require some volume of credit card sales. Once you’ve been approved, you’ll need to confirm it’s set up properly with a credit card processor.
- Verify receipt of MCA funds and repayment amounts: The last step is to confirm you’ve received the agreed-upon amount of MCA funds. We also recommend verifying the daily repayment amounts are consistent with your loan agreement.
How a Business Loan Works
With a small business loan, it’s important to know that some financing options only allow the loan proceeds to be used for certain purposes. With that being said, we’ve summarized the steps below involved with getting financing, and you can get more detailed information in our guide on how to get a small business loan:
- Determine what you’ll use loan proceeds for: Since some business loans have restrictions on what funds can be used for, you’ll need to have a good understanding of your plans with the money so that you can choose the right loan option.
- Consider available financing options: Depending on how you intend to use the funds, a specialized loan can offer more competitive rates and terms. You can also consider general-use business loans if you want more flexibility.
- Understand your qualifications: Knowing the strength of your credit and finances can give you an idea of your approval odds and the likelihood of qualifying for a lender’s best advertised rates.
- Choose a lender and apply: Like MCAs, you can consider banks, credit unions, brokers, and online lenders. We recommend shopping rates with several of these before making any final decisions.
- Review loan terms and verify receipt of funds: If a lender reviews your application and determines it can issue an approval, you’ll want to confirm that the terms are acceptable prior to accepting it. Once you’ve signed the final loan documents, funds are typically issued within 24 to 48 hours.
Frequently Asked Questions (FAQs)
A factor rate indicates the total amount that must be repaid. This is calculated by taking the factor rate and multiplying it by the loan amount. For example, a factor rate of 1.20x on a loan amount of $100,000 means that a total of $120,000 must be repaid to satisfy the loan obligation.
Yes. The type of business loan you get can determine what you are allowed to use the funds for. Common examples include working capital loans, equipment loans, startup financing, business acquisition loans, commercial real estate loans, and more.
Since MCAs are very expensive, getting a business loan is usually the better option. If used responsibly, however, MCAs and business loans can both be used to help a company that is in a tight financial position.
Bottom Line
If your business needs funding, a business loan is usually the better option. However, if you’re not able to get approved for financing, an MCA can be a good last resort. As with any loan, make sure you understand the rate and fee structure and can afford to make timely payments. We also recommend that you consider your expected return on the money borrowed before you agree to take out a loan.
If you’re looking for a small business loan, we recommend working with a provider like SBG Funding. SBG Funding was one of our picks for the best working capital loans because of its commitment to delivering excellent service, competitive rates, and custom loan options to fit your needs.
