Both merchant cash advances (MCAs) and business loans can provide your company with necessary operating capital. However, business loans should always be your first choice when possible. Merchant cash advances are an expensive form of credit that should only be used as a last resort for businesses that cannot qualify for other types of financing. If you qualify for a business loan, you should choose it over a merchant cash advance.
Whether you choose a merchant cash advance or a business loan, Lendio can help you out. Lendio is a free marketplace where you can compare options from 75+ lenders. Once you find your match, funds can be available in as little as 24 hours.
When To Consider a Business Loan
As long as your business qualifies, a business loan should be your first choice for financing compared to a merchant cash advance. Interest rates and fees are considerably lower, and repayment terms are much more straightforward than an MCA. Even if you have a lower credit score, loan options are available.
The following types of borrowers should consider a business loan:
- Borrowers with good credit
- Established and profitable businesses
- Businesses seeking large amounts of capital
- Businesses needing stable repayment terms
Business Loan Pros and Cons
|Lower interest rates and fees
|Funding may be slower
|Monthly repayment easier to budget for
|Borrowers with low credit scores may not qualify
|Simple repayment terms
|Businesses with inconsistent revenue may struggle with fixed payments
Applying for a Business Loan
Most working capital loan providers have online applications that can be completed in minutes with decisions and funding within 24 hours. For larger loan amounts, funding may take up to a few days. Before applying, check out our article on how to get a small business loan.
Fundbox is an excellent choice for companies looking for an easy business loan. You can secure a loan of up to $150,000 in just one business day. Stop by Fundbox’s website for more information or to apply.
When To Consider a Merchant Cash Advance
A merchant cash advance should only be considered as a last resort for financing your business. If you cannot qualify for any other type of financing and have to obtain funding for your business, only then should you consider an MCA.
The following types of businesses should seek a merchant cash advance:
- Businesses unable to qualify for other types of credit
- Seasonal businesses with fluctuating income
- Online merchants who receive mostly credit card payments
An MCA allows you to receive a lump-sum advance payment in exchange for a fixed percentage of daily credit card receipts. The amount repaid daily is calculated by the holdback percentage, ranging between 8% and 30%. Because repayment terms are short and the cost of borrowing is so high, the APR can exceed 150%.
MCA Pros and Cons
|Low minimum qualifications
|No control over payment size
|Payments based on revenue
|Requires daily payments
How To Apply for an MCA
The application process for an MCA is similar to that of a business loan. You’ll need your social security number, business tax ID, and general information about the business.
There are also items needed that are specific to applying for an MCA. You’ll need at least two months of credit card processing data, at least two months of bank statements, and evidence of at least two years of accepting credit cards.
The approval process usually takes less than 24 hours. Once approved, the lender will let you know how large of an advance you qualify for, the factor rate, and the required holdback. If you cannot obtain funding from another option, you can accept the MCA terms and receive financing.
Lendio is our choice for the best merchant cash advance provider. Lendio’s marketplace has the lowest minimum APR of all other providers. In addition, Lendio has other funding options that you might qualify for as an alternative to an MCA. Stop by Lendio’s website for more information.
MCA vs Business Loan at a Glance
While the maximum loan amounts are the same for merchant cash advances and business loans, that’s where the similarities stop. MCAs have higher APRs, shorter terms, and lower minimum credit scores. Daily payments can be challenging to budget, especially because the payment is based on daily credit card receivables. So as that fluctuates, the payment will vary each day.
Business loans have lower interest rates and fees, therefore they have lower APRs. Monthly repayment is much easier to budget for as long as the business doesn’t have a fluctuating income. The longer maximum term makes it easier to spread repayment out, which helps short-term cash flow. Credit requirements are higher, but many borrowers with lower credit scores can still find a loan that will cost them considerably less than an MCA.
So long as you can qualify for a business loan, it’ll almost always be the best choice for business funding over a merchant cash advance. MCAs are last-resort funding due to the high cost of borrowing money. If you must get an MCA due to a pressing need for funding, make sure to refinance it into a business loan as soon as possible to save your company money.