Merchant Cash Advance vs Business Loan Which Is Right for Your Business

There are many different financing options available to businesses that need to supplement their cash flow, make a purchase, fulfill expansion goals, or simply cover this month’s operating expenses. Understanding the key differences between merchant cash advances vs business loans, along with finding the right lenders to work with, can be overwhelming even for seasoned small business owners.

In this article, we explore the pros, cons, and repayment terms of merchant cash advances vs business loans, helping you identify the best type of financing to meet your business needs.

What Is a Merchant Cash Advance?

Merchant Cash Advances (MCAs) are a form of financing that allows a small business to receive a lump sum of cash up front, in exchange for a portion of future revenue, typically from credit card transactions or debit card sales. Although MCAs are not classified as traditional business loans, they function as a commercial agreement where future receivables are sold to the merchant cash advance company.

Unlike term loans with fixed monthly payments, this business advance funding offers flexible repayment structures. The repayment amount is based on a set percentage of your daily or weekly sales. This means payments adjust automatically depending on your cash inflow which can be higher during busy seasons and lower when sales dip.

When applying for a merchant cash advance online, they usually don’t require a personal guarantee or collateral, making them a solid funding option for businesses with bad credit or inconsistent income. However, for small business cash advances, loan providers assess bank statements, financial statements, and credit card sales volume during their underwriting process, not just your credit score.

Benefits of Merchant Cash Advances

Comparing merchant cash advances vs business loans, MCAs can come with higher interest rates, sometimes calculated through a factor rate instead of an annual percentage rate (APR). Also, it’s important to watch out for additional fees that can increase the overall cost of this type of business financing. Here are the known benefits of the small business advances:

• Quick access to funds.
• Suitable for businesses with bad credit, limited credit history, or low personal credit scores.
• No need for collateral or a personal guarantee.
• Payments are tied to sales, which means lower payment amounts during slow periods.
• Approval is easier compared to traditional lenders, with a simplified application process.

What is a Business Loan?

A business loan is a more conventional form of financing where the borrower receives a fixed amount as a lump sum, repaid in regular installments over a defined repayment period. These repayment terms may be short-term or long-term and can include monthly payments at either a fixed or variable interest rate.

Some of the best quick business loans include:

SBA Loans

Backed by the Small Business Administration (SBA), these loans are ideal for businesses with good credit and strong financial statements. While the approval process can be longer due to extensive underwriting, SBA loans typically offer lower interest rates and longer repayment schedules. Some common SBA options include:

• SBA 7(a) Loan – Offers up to $5 million for general business funding needs.
• SBA Microloan – Up to $50,000 for startups and working capital.
• SBA Express Loan – Faster turnaround with a cap of $350,000.

Invoice Factoring & Invoice Financing

These business advance loans are suited for businesses with strong receivables but weaker credit scores. With invoice factoring, you sell unpaid invoices to a third-party at a discount. Invoice financing, on the other hand, lets you borrow against unpaid invoices while still handling customer collections.

Business Term Loans

Available through traditional banks, credit unions, and online lenders, term loans provide a lump sum repaid over time. If we compare merchant cash advances vs business loans, business loans work well for purchasing equipment, expanding operations, or refinancing debt due to their lower interest rates.

Making consistent monthly payments can also improve your credit score, making you eligible for larger loans or a business line of credit in the future.

Benefits of Business Loans

Comparing merchant cash advances vs business loans, traditional lenders who offer business loans often have strict eligibility requirements. You may need to show good credit, strong financial statements, and a solid credit history. The origination process can take longer, especially with a bank loan. Here are the benefits of securing business loans:

• Larger loan amounts available for well-qualified borrowers.
• Predictable monthly payments and fixed repayment terms make budgeting easier.
• Options for both short-term and long-term borrowing.
• Lower interest rates compared to MCAs, especially from traditional business loans.
• Available from both traditional banks and online lenders.

Merchant Cash Advances vs Business Loans: Which One Is Right for You?

Deciding which option to choose, merchant cash advances vs business loans, is surely not an easy task. However, both are popular funding options, but the right choice depends on your type of business, cash flow patterns, credit standing, and how quickly you need the funds.

Here's a comprehensive comparison between merchant cash advances vs business loans to help you weigh your options.

You May Consider a Business Loan If:

• You Have Strong Credit: If your small business has a proven credit history, steady revenue, and good or excellent personal credit scores, you are likely to qualify for traditional business loans or term loans. Lenders often offer lower interest rates and higher loan amounts to businesses with higher credit scores, allowing you to secure affordable financing over longer repayment periods.
• You Want Predictable Monthly Payments: One of the key advantages of business term loans is their consistent monthly payment structure. If budgeting is important to your business operations, fixed repayment terms help you manage your cash flow better. You'll know exactly how much you owe each month and when the loan will be fully repaid.
• You Need a Larger Loan Amount for Long-Term Goals: Business loans are ideal for large investments such as purchasing equipment, acquiring real estate, or expanding operations. Whether you're opening a new location or investing in high-cost inventory, a lump sum loan from a traditional bank, credit union, or online lender can provide the substantial capital you need to scale.
• You Can Wait for the Approval Process: Because of the more detailed underwriting involved when compared merchant cash advances vs business loans, the application process for a bank loan or SBA loan can take several days or even weeks. You’ll likely be asked to submit bank statements, financial statements, tax returns, and proof of profitability. If you can afford the wait and have the necessary documentation, this type of business financing can be cost-effective and reliable.
• You Want to Build Business Credit: Making consistent, on-time payments on a term loan can positively impact your business credit score, improving your eligibility for future business financing such as a business line of credit or higher-value loans.

You May Consider a Merchant Cash Advance If:

• You Need Quick Access to Capital: If time is of the essence between merchant cash advances vs business loans, merchant cash advances are one of the fastest ways to get funding. Many MCA providers can approve your application and transfer funds to your bank account within days. This makes them a go-to option for urgent expenses such as equipment repair, inventory restocking, or covering payroll during a slow sales month.
• Your Business Has Inconsistent or Seasonal Cash Flow: Since MCAs are repaid using a percentage of daily credit card transactions or debit card sales, your payment amount adjusts based on actual revenue. This flexible repayment structure is ideal for businesses with fluctuating income like restaurants, salons, and retail stores.
• You Have Bad or Limited Credit History: Unlike traditional lenders, MCA providers often approve businesses with bad credit or no formal credit history. Here the approval is typically based on the volume of future credit card sales, not your personal credit score. If your business has steady card sales, you could still get funding even after being turned down for a bank loan.

Merchant Cash Advance vs Business Loan: Side-by-Side Comparison Table

NOTE: Terms and rates may vary between lenders and are subject to approval.

Where to Find the Right Business Financing

You can find business financing through both traditional banks and online lenders. A traditional bank may offer a bank loan with attractive repayment terms, but the application process can take weeks and is best suited for businesses with excellent credit scores and long credit histories.

However, for quicker options, online lenders and MCA providers offer flexible funding options with faster approval processes. Also, between merchant cash advances vs business loans, funds through MCAs can be deposited into your bank account quickly. Also, these lenders consider more than just your credit score, including bank statements, revenue history, and business type.

Therefore, before choosing between merchant cash advances vs business loans, it is important to compare rates, check origination and additional fees, and ask about the repayment period, total cost, and lender reviews.

Bottom Line

Running a small business means keeping a close eye on your financial health and seizing opportunities when they arise. When comparing merchant cash advances vs loans for business, the best solution depends on your timing, loan amount, creditworthiness, and long-term plans.

Evaluate your financing options carefully. If you're unsure what to choose between merchant cash advances vs business loans, consult a professional to assess your eligibility and walk you through the approval process. With the right approach, you’ll find the perfect form of financing to support your growth.

FAQs About Merchant Cash Advances vs Business Loans

What is the difference between a merchant cash advance vs a business loan?

The main difference between merchant cash advances vs business loans lies in how the funding is repaid. A merchant cash advance (MCA) is repaid through a percentage of your daily sales, while a business loan involves fixed monthly payments over a set term.

Is a merchant cash advance a type of loan?

Technically, no. A merchant cash advance is not considered as a loan. It’s a commercial agreement where you sell a portion of your future sales in exchange for upfront capital. Despite this, many businesses consider it a form of business advance funding.

Which is better: a merchant cash advance or a business loan?

Comparing merchant cash advances vs business loans depends on your business needs. If you need fast funding and have bad credit or fluctuating revenue, a merchant cash advance may be more suitable. However, if you have strong credit and can wait for approval, a business loan may be the better option.

What types of businesses typically use merchant cash advances?

MCAs are commonly used by retail stores, restaurants, salons, and other businesses with consistent credit/debit card sales. These businesses benefit from the flexible repayment model based on daily revenue, making small business cash advance loans a practical option.

Are business loans cheaper than merchant cash advances?

In some cases. Traditional business loans have lower interest rates and APRs compared to merchant cash advances, which use higher factor rates. However, MCAs provide speed and flexibility, which some business owners are willing to pay a premium for.

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