Understanding the Difference Between a Merchant Cash Advance and a Traditional Bank Loan
Your business is growing at a steady rate and bringing in solid revenue month after month. Still, you don’t have a huge profit margin yet and need cash flow to cover business expenses. Perhaps you need to expand your space to keep up with business growth, or maybe you need to invest in a new piece of equipment to make sure your company doesn’t fall behind the competition. Either way, you are in need of some business financing and are probably wondering how to get the money you need.
Two of the options you might consider are merchant cash advances and traditional bank loans. Both options are ways to go through lenders to get the cash you need. Beyond that obvious similarity, there are major differences between merchant cash advances and traditional bank loans that you should know about before you decide what to do for business funding.
What Is a Merchant Cash Advance?
You already know how bank loans work: you go to the bank, request financing, and go through a long application and vetting process to get approved. If the bank thinks your business will be able to repay their loan, they will approve your application and give you some money. Over time, you will have to repay the bank loan with interest, but the money will hopefully give you the freedom you need to grow your business and bring it to a more prosperous and profitable level.
A merchant cash advance is a more niche-based type of small business funding that will only be a possibility if your business has frequent receipts from credit or debit card sales. To accept credit or debit cards, your business needs to work with a company that can process credit card payments. These processors are also known as merchant account providers. In a merchant cash advance, instead of getting a loan from the bank, you are getting a lump sum monetary loan from your merchant account provider. Your merchant account provider will then take a percentage of your credit card sales each day until your business has paid off the original amount plus interest.
The Differences Between Traditional Bank Loans and Merchant Cash Advances (and Determining Which Business Funding Option Is Right for You)
As you can see, there are a few major differences between traditional bank loans and merchant cash advances. The financier is one big difference: with a bank loan, you are working with… well, the bank. With a merchant cash advance, you are working with your credit card processor. The terms of repayment are also very evidently different. With a bank loan, you will have to remember to make payments on the loan every month (or more frequently, depending on your terms). With a merchant cash advance, the entire process is automated, with your credit card processor just taking a set amount of your credit or debit card sales—usually on a daily basis.
Based on these two key differences, a merchant cash advance may well be the preferable option for your business funding needs. After all, plenty of people would tell you that banks are difficult to deal with, and the day-to-day automated setup of merchant cash advances makes them easy and largely not intrusive.
There are also other features of merchant cash advances that make them more attractive than traditional bank loans, from faster approval times to a lack of collateral. Merchant cash advances aren’t technically loans, so there’s no real reason to put up collateral. The “collateral” is your future credit card sales. You are essentially “selling” a portion of these sales to get an upfront cash payment.
The bottom line is that, if your business is in retail or some other industry where credit card sales are a substantial percentage of your revenues, it’s worth looking into a merchant cash advance for your business funding. You won’t have to jump through the hoops that come with applying for a loan and you will only have to give up a set percentage of your daily card sales. In other words, if you have a big sales day, you will make a bigger payment; if you have a smaller day, you won’t pay off as much. Either way, you won’t have to worry about a payment that you can’t cover. Get in touch with a reputable business funding company to talk about your possibilities.