If you are in need of working capital, a business cash advance and business loan are solid options to get funding. However, in the world of finance, no two products are created equal. Each product is different and comes with its pros and cons, and it is up to you, the business owner, to decide which one is right for you.
What’s the difference between a business cash advance and a business loan?
Both a business cash advance and a business loan are perfect options if you need to purchase inventory, office equipment or meet your short-term operational needs.
A business cash advance, also known as a merchant cash advance, is an upfront capital advance that your business is expected to pay back using a percentage of its daily credit card sales. You are selling the lender a certain percentage of your future revenue earned from credit card sales. Plus, there are no fixed repayment terms, which is why it is not a loan.
A business loan, however, is a loan that has a fixed and predictable monthly repayment schedule. In exchange for the working capital, you agree to pay back the lender in full with added interest. The fixed monthly payments happen until all the debt gets paid.
If you are getting a secured business loan, collateral will be required to back the loan. Collateral will often be an asset, such as real estate or even business inventory. For a business cash advance, there is no collateral required. To assess whether you can pay back the loan, the lenders will look at your business’ credit transactions history.
Interest rates for business loans are usually more competitive than those for business cash advances. For example, the lowest interest rate you can expect for a small business loan on average can be between 4% and 6%, while the lowest rate for a merchant cash advance you can expect on average is around 20% (this is due to the high risk involved).
For a business cash advance, there are no fixed payment terms, and it can be structured in numerous ways, making it extremely flexible. For example, websites like https://www.merchantmoney.co.uk/ advance you 100% of your monthly credit card transactions and automatically collect a small percentage from your credit and debit card sales until the amount gets paid – however long that takes. This is what makes a merchant cash advance perfect for businesses that see seasonal cash flow.
On the other hand, a business loan has maturity dates that are fixed and indicate precisely when the monthly payments should be. Failure to meet these payments results in penalties, making them an excellent option for businesses that see stable cash flow.
The application process of a merchant cash advance is easy and fast (usually completed within minutes), and you can expect to access the capital within a week. For a business loan, the application process is lengthy and can take a couple of days or weeks to finalize.
Which financing option is right for you will depend on many factors, such as the type of business and industry, what you need it for, cash flow frequency and the amount of risk you are willing to incur. Ultimately, you need to weigh the advantages and disadvantages of each financing option.