A merchant cash advance and a business loan are two financing options that provide small businesses with working capital. While both can be a good financing option, the way the two products are structured differs greatly. To help you decide between a merchant cash advance vs business loan, we compare and contrast the two, including a detailed example of each financing option. We’ll also discuss rates and qualifications, as well as how quickly you can be funded.

If you’re looking for short-term working capital, OnDeck offers term loans from $5,000 – $500,000. Prime borrowers can see rates as low as 9.99%. Their average APR is ~40% which is about ⅓ that of a MCA. Terms range from 3 – 36 months and funding can happen as quickly as 1 day.

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Merchant Cash Advance vs Business Loan: How They Work and How They’re Different

A merchant cash advance and a business loan are both working capital loans. These financing options help businesses purchase equipment, expand operations, meet payroll, deal with seasonality, and more. Even though both of these options can be used for the same purposes, there are many differences between the two.

Let’s take a look at the primary differences between a merchant cash advance and a business loan:

Merchant Cash Advance vs Business Loan

Short-term business loans are a common financing option used for working capital. A business loan works just like a mortgage or a car loan. A lender offers to loan your business a specific dollar amount in return for fixed, regular payments. These fixed payments have average interest rates around 40% and the payments are typically amortized over the loan’s term.

The repayment schedule on a business loan can be daily, weekly, or monthly. However, there’s always a fixed maturity date with a business loan, and you’ll always repay the loan in full by that maturity date. The typical loan amount is between $5,000 – $500,000 and the time it takes to receive those funds is often 1 – 3+ days.

A merchant cash advance, on the other hand, is technically not a loan. Instead of loaning you money, merchant cash advance providers “purchase” your future credit card receivables at a discount. This means that they advance you a lump sum payment that you repay with a percentage of your daily credit and/or debit card receipts.

The percentage is called the “holdback percentage,” and while it’s constant throughout the life of the MCA, credit card receipts vary each day and the daily dollar amount you repay is variable. Therefore, there’s no fixed due date for paying back the advance, meaning that the APR can vary widely (generally between 80% – 120%). However, most MCAs are paid back in 4 – 18 months.

The time to funding with a merchant cash advance is typically between 1 – 3+ days. Lump sum payments are advanced between $5,000 – $500,000 and can’t be more than 50% of a company’s annual credit card sales.

We spoke with Ryan Rosett, CEO of the merchant cash advance provider Credibly, who told us that:

“In essence, it’s typically best for people who have inconsistent payments (for lack of a better word). While the more obvious examples are quite literally seasonal businesses (pool installation in Michigan, Ice cream parlors, florists, etc.) it’s really beneficial for any company that experiences significant fluctuations in payments received.

Imagine some cases where a business may have infrequent, high-margin sales: A boutique 3D printer re-seller may only need 5-10 sales per year to do well. However, this pricey piece of equipment has a long buying cycle. An MCA would be a pretty ideal funding solution as it would give the company what they need to maintain day-to-day operations in between sales, and the repayment terms would be easier to meet.”

However, while this is a good example of when an MCA is a good option, it’s important to assess your specific qualifications and needs. To help you better understand when an MCA is right for you, let’s discuss when to consider a business loan vs. when to consider a merchant cash advance.

How to Determine if a Merchant Cash Advance or a Business Loan is Right For You

Understanding how an MCA and a term loan work is important in knowing which is right for your business. For example, a merchant cash advance (MCA) might be costlier than a business loan. But an MCA also typically has more flexible repayment terms, causing less of a financial burden.

When to Consider a Business Loan

For small businesses that aren’t seasonal or don’t have significant credit card sales, a business loan is going to be the better choice. Here’s when it makes sense to choose a business loan over a merchant cash advance:

You have good credit – If your credit score is over 640 (check here for free) and you don’t have a recent bankruptcy or tax lien on your credit report, you’re in a good position to get approved for a business loan.

You’re an established, profitable business – If you’ve been in business for more than 1 year and are profitable, your business likely has more traditional borrowing options available.

You need a large amount of capital – The amount of money you can get with an MCA is tied to the level of your credit card sales. Term loans can provide larger loans because of the longer repayment terms, like alternative business loans (up to 3 years) peer-to-peer business loans (up to 5 years) or SBA loans (up to 10-25 years) could allow you to borrow a lot more than an MCA.

You want stable repayment terms – While some small business owners appreciate the flexibility of a merchant cash advance, the repayment schedule is variable. Business loans, on the other hand, have predictable installment payments, so you can better plan for business growth.

When to Consider a Merchant Cash Advance

A merchant cash advance is a good idea for seasonal businesses or businesses that have a high volume of credit card sales. Specifically, a merchant cash advance might be appropriate if you meet the following:

You don’t want a loan on your credit report – If you’re trying to rebuild your credit or are planning for a big purchase, such as buying a home, you may not want a business loan showing up on your credit report. An MCA doesn’t generally show up on your credit report.

You run a seasonal business – Due to the repayment terms, a merchant cash advance is a good option for seasonal businesses. This is because the amount repaid is less when a business is making less revenue and the repayment amount increases when the business makes more revenue. This is in contrast to business loans that have fixed monthly payments regardless of business performance.

You’re an online merchant – Online merchants and other businesses that conduct a majority of their sales online are prime candidates for a merchant cash advance. This is because they’ll able to receive a high advance amount in return for just a portion of their daily credit card receipts. If you earn revenue via check or cash, a merchant cash advance probably isn’t right for you.

Qualifications: Merchant Cash Advance vs Business Loan

Both merchant cash advances as well as business loans are typically easier to qualify for when compared to other working capital loans. Still, the minimum qualifications for a merchant cash advance differ from the qualifications for a business loan.

The main difference is that a merchant cash advance provider is more concerned with the credit card sales of a company while a business lender typically looks at a company’s total revenues. Let’s take a moment to look at the differences in qualifications in more depth.

Qualifications: Merchant Cash Advance vs Business Loan

Business Loan Qualifications

A business loan typically looks at three major factors when assessing a borrower’s business loan application. These factors take into account both the performance of the business as well as the creditworthiness of the business owner. Specifically, the average qualifications needed for a business loan are as follows:

• Annual business revenue: $50k+
• Time in business: 12+ months
• Minimum credit score: 500 (check your credit score for free here)

Merchant Cash Advance Qualifications

By contrast, a merchant cash advance (MCA) typically looks more at a company’s credit card sales than other performance metrics. This is because MCAs are loaned out based on annual credit card receipts and repaid using a company’s daily credit card receipts. However, the creditworthiness of the business owner, like a business loan, is also considered. The specific qualifications needed to for a merchant cash advance are typically the following:

• Monthly credit card sales: $5k+
• Time in business: 3 – 6+ months in business
• Minimum credit score: 500+ (check your credit score for free here)

In order to receive a merchant cash advance, you’ll also need to have an account with an approved credit card processor. This means that you might have to change your credit card processing company, depending on the MCA provider.

Costs: Merchant Cash Advance vs Business Loan

The costs of a merchant cash advance and a business loan are different from each other. For example, a business loan charges an interest rate that you pay with either daily, weekly, or monthly payments. A merchant cash advance (MCA), on the other hand, charges what’s known as a “factor rate” and collects a “holdback percentage,” both of which alter the APR.

Further, both an MCA and a business loan have different fee structures. Let’s look at the full range of costs of a merchant cash advance and a business loan

Costs: Merchant Cash Advance vs Business Loan

Business Loan Costs

A business loan is structured much like any other type of loan, such as a mortgage or an auto loan. When it comes to its annual percentage yield (APR), business loans typically have a range from 9.99% – 60%. However, only prime borrowers can receive rates as low as 9.99%. Standard borrowers should expect an APR around 40%.

When it comes to the fees associated with a business loan, the typical costs are as follows:

• Origination fee: 1% – 5%
• Prepayment penalty: 1% – 5%

These fees are typically taken directly out of the loan and don’t come out of a borrower’s pocket. If you’re interested in a business loan with low costs, you should check out Kabbage or OnDeck. Both lenders offer loans from $5,000 – $500,000 with interest rates starting between 9.99% – 15%.

Other types of business loans, such as accounts receivable financing, also have low costs, fast funding times, and base their lending primarily on your current revenue. There are companies such as Fundbox that offer both lines of credit $1,000 – $100,000.

Merchant Cash Advance Costs

A merchant cash advance (MCA) is unique in the way that it assesses costs. For example, while an MCA has an estimated APR, that rate isn’t the actual cost of capital. Instead, a merchant cash advance charges what’s known as a “factor rate.”

A factor rate is the total amount you’ll have to repay an MCA provider over the life of the advance. For example, if you have a factor rate of 1.20, you’ll need to pay back the entire lump sum plus an additional 20%. So, if you received $100,000 in a merchant cash advance, you’ll repay a total of $120,000.

However, since repayments are taken directly out of your daily credit card sales, and since those sales fluctuate, the actual term of an MCA is variable. This causes the calculated APR to typically be between 80% – 120%. Remember, though, that this rate is backed into and your actual cost of capital is dependent on the factor rate.

The only other fees associated with a merchant cash advance is an origination fee between 1% – 5%

However, the most important costs are the factor rate and the holdback percentage. The factor rate is the total amount of capital you’ll have to repay your provider and the holdback percentage is the percentage of daily credit card sales the provider collects until the factor rate is repaid in full.

“Merchant cash advances are not a good idea in most cases if a business is struggling to make ends meet and hoping that a cash injection will help. Unfortunately, some businesses in that situation get denied for a loan, but are eligible for a cash advance, and end up in a worse situation than before.”

— Ellen Cunningham, Marketing Manager at CardFellow

Funding Speed: Merchant Cash Advance vs Business Loan

Both a merchant cash advance as well as a business loan offer fast funding. For example, the typical business loan can be approved and funded within 1 – 3+ days. Funds are typically deposited directly into the business’s bank account.

A merchant cash advance (MCA) can also finance with equal speed. For example, an MCA is typically approved and funded within 1 – 3+ days. The funds, like with a business loan, are usually deposited directly into the business’s bank account.

Where to Apply for a Merchant Cash Advance or Business Loan

There are many places you can apply for either a merchant cash advance or a business loan. Further, you can find business loans that are lines of credit, accounts receivable financing, and more. Specifically, we recommend the following lenders and providers:

Where to Apply for a Business Loan

Lender	Best For:
Visit Kabbage	Best for businesses looking for fast and flexible credit lines up to $100K. Apply here.
Visit OnDeck	Best for businesses that need shorter-term loan up to $500K. Apply here.
Visit Fundbox	Best for businesses that want up to $100K in financing based on their outstanding invoices. Apply here.

Where to Apply for a Merchant Cash Advance

Lender	Best For:
Visit Credibly	Best for businesses that want an advance up to $250,000 and a low factor rate. Apply here.
Visit Fora Financial	Best for businesses that have $10k+ in monthly revenue and need an advance between $5,000 - $500,000. Apply here.
Visit RapidAdvance	Best for businesses that want an advance up to $500,000 and don’t want to pay an origination fee. Apply here.

Bottom Line

A merchant cash advance and a business loan are both good short-term working capital financing options. However, due to the structure of each, you might be more suited for one over the other. If you run a seasonal business or have a high volume of credit card transactions then a merchant cash advance might be right for you. Conversely, if you have stable revenues and accept cash and checks, you might want to check out a business loan.

OnDeck offers term loans from $5,000 – $500,000. Prime borrowers can see rates as low as 9.99% while the average APR is ~40%, terms are between 3 – 36 months, and funding can happen as quickly as 1 – 3 days.

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