Merchant Cash Advance vs. Line of Credit: Which is Right for Your Business?

Disclaimer: Information in the merchant cash advance articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the merchant cash advance articles often covers financial products that Biz2Credit does not currently offer.

At some point, most small businesses need to find access to capital. A supplier fails to come through with an order, a spike in customer demand strains your inventory — there are many reasons why you might need to increase your cash flow.

While traditional bank loans are great resources for small business owners, a business loan is not the right solution for every business funding challenge. There are better short-term funding options, like a merchant cash advance (MCA) or business line of credit.

In this article:

• Learn the differences between a merchant cash advance and a business line of credit.
• Explore the benefits and drawbacks of each type of financing.
• Understand what kind of business financing is right for your business.

What is a Merchant Cash Advance?

An MCA is a form of merchant financing in which one business provides upfront funding to another business in exchange for a percentage of future sales. Usually, the MCA provider gives an upfront, lump sum amount to a borrower and takes a percentage of credit card sales or debit card sales until the repayment terms have been satisfied.

Rather than pay an interest rate, the total repayment amount is calculated using a factor rate. This number, usually between 1.1 and 1.5, is multiplied by the loan amount to determine the total repayment amount. So, if a business borrowed $10,000 with a 1.3 factor rate, the total repayment amount would be 10,000 x 1.3, or $13,000.

With an MCA, you pay as you go, usually with daily or weekly payments based on your sales. Rather than paying a fixed amount, MCA repayments are based off your business’s performance.

The best merchant cash advance companies and online lenders can offer funding the same day as you apply. Getting a merchant cash advance online is easy for most businesses.

What is a Business Line of Credit?

A business line of credit, sometimes called a merchant line of credit, is like a combination of a traditional term loan and a business credit card. Once approved by a lender, a business owner has access to a maximum amount of credit that they can draw upon to make purchases. Unlike a loan, they’ll only pay interest on the amount they use, and will be able to access the full credit line as long as they pay it back within the statement period.

Business lines of credit are offered by most credit card companies, as well as many traditional lenders like banks and credit unions. Like the best merchant cash advances, you can apply online and get approved quickly, sometimes in as little as 24 hours.

Which Financing is Right for Your Business?

There are benefits and drawbacks to both MCAs and business lines of credit. Ultimately, the right choice for your business really depends on your specific situation and type of business. We’ll go into more specific examples in the next section, but to give you a basic idea, we’ve compared the two financing types in the chart below:

Pros and Cons of Merchant Cash Advances

Pros:

• Fast funding
• Easy application process
• Low eligibility requirements
• Flexible repayments
• No collateral or personal guarantee

Cons:

• Sometimes confusing terms
• Sometimes high origination and additional fees
• Frequent repayments

Pros and Cons of Business Lines of Credit

Pros:

• Builds credit
• Fast funding
• Only pay interest on what you use

Cons:

• Higher interest rates
• Terms based on credit score
• Easier to overspend

How to Choose the Right Funding

To choose the right type of financing is right for your business, you need to ask a few questions. What are you going to use the funds for? How much do you need? How fast do you need the money?

Depending on the answers to these questions and your business’s financial situation, either an MCA or a merchant line of credit may be right for you. We break down a few specific scenarios here.

You Have Bad Credit: Merchant Cash Advance

If your business has a bad business credit score or you have a bad personal credit score, an MCA is a better choice. MCAs have lower qualifying credit score requirements than business lines of credit. Not only that, but you’ll likely have a high interest rate and low credit limit if you have a bad credit score.

There is one important caveat, however. If you’re interested in building credit, a business line of credit can help do that, so long as you manage it responsibly. MCAs are not reported to credit bureaus so have no impact on your credit report.

You Have Good Credit: Business Line of Credit

On the other hand, if you have a personal credit score over 700 and a strong credit history, you’ll likely qualify for high limits and competitive interest rates.

You Take Credit Cards: Merchant Cash Advance

MCAs are often paid back through credit card transactions. So, if your business accepts credit cards or debit cards as payment, it can be easier to repay the merchant loan through daily credit receipts.

Your Business is Growing Slowly: Business Line of Credit

Let’s say your medical supply business is growing — just not as fast as you might expect. With a business line of credit, you have flexible, long-term access to funding. With that money, you can purchase inventory when you need to meet demand, hire the occasional employee, invest in research and development, and more over time.

Business lines of credit are best for businesses that don’t need a huge influx of cash immediately, but who need consistent, frequent access to some working capital and cash flow.

Seasonal Businesses: Merchant Cash Advance

Many seasonal businesses seek business cash advances because repayment is based on business performance. For instance, a restaurant in a resort town can take out an advance in the slow season to pay salaries and keep earning a small profit before paying back the majority of the advance in the busy season.

Your Business is Profitable: Business Line of Credit

Profitable businesses will qualify for better terms, but they also have less of an incentive to cut into those profits. MCA payments are determined through sales percentages. If your business is already profitable, it doesn’t make sense to get a loan that will instantly limit those profits.

Need Quick Access to Cash: Merchant Cash Advance

Your construction company just won a huge contract, but you need to break ground next week. Your e-commerce company’s headphones went viral on TikTok and you need to make more of them to meet demand. When you have sudden, urgent business needs, an MCA is your best bet.

The best merchant cash advance companies offer online applications and can process them very quickly. If approved, you can have cash in your business bank account on the same day you apply.

Conclusion

Every small business owner must assess what type of financing is right for their business. Both merchant cash advances and business lines of credit have benefits, and it’s possible that both make sense for some small businesses.

Generally speaking, if you need fast access to cash to address emergency business needs or manage slow times, an MCA is a good choice. If you need prolonged, flexible access to working capital, a business line of credit makes sense.

Fortunately, you can get both a business line of credit and a merchant cash advance online with ease, so if you decide you need one, you can do it quickly.

FAQs

What is a merchant cash advance?

A merchant cash advance is a type of merchant financing in which a company loans money to another company in exchange for a percentage of future credit card sales or other accounts receivable.

What is a business line of credit?

A business line of credit is a cross between a term loan and a business credit card. When approved, a small business has access to a maximum credit limit, but they only pay interest on the amount they use. If they repay the credit amount on time, they’ll have access to the full line of credit.

How to choose the right funding?

Choosing the right financing option for your business depends on myriad factors. However, generally, an MCA is better for businesses that need fast access to a large influx of cash while a business line of credit is better for businesses that need continued, frequent access to smaller amounts of capital.

What are the benefits of a merchant cash advance?

An MCA's primary advantages over other forms of financing are quick funding, low eligibility requirements, and flexible repayment structures.

What are the benefits of a business line of credit?

The primary advantages of a business line of credit are a fast approval process, flexible repayment terms, and the opportunity to build credit.

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