Merchant cash advances and business loans are both working capital loans. These financing options help businesses purchase equipment, expand operations, meet payroll, deal with seasonal issues, and more. Even though both of these options can be used for the same purposes, there are many differences between the two including the cost of financing, repayment terms, and qualifications.
The Rules of Thumb blog from MoneyThumb found the following great graph at Fit Small Business that explains the main differences between a merchant cash advance and a business loan.
Merchant Cash Advance vs Business Loan
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Understanding how both a merchant cash advance and a short-term business loan work is important in determining which option right for your business. If you have a seasonal business or don’t otherwise qualify for a business loan, a merchant cash advance might be the option for you, although business loans will cost less overall.
When to Consider a Business Loan
1. You Have Good Credit
If your credit score is 640 or more and you don’t have a recent bankruptcy or tax lien on your credit report, you’re in a good position to get approved for a business loan.
2. You’re an Established, Profitable Business
If you’ve been in business for more than one year and are profitable, your business likely has more traditional borrowing options available.
3. You Need a Large Amount of Capital
The amount of money you can get with a merchant cash advance is tied to the level of your credit card sales. Term loans can offer higher funding levels because of the longer repayment terms, such as alternative business loans, have terms up to three years, peer-to-peer business loans have terms up to five years, and Small Business Administration (SBA) loans have terms up to 25 years.
4. You Want Stable Repayment Terms
While some small business owners appreciate the flexibility of a merchant cash advance, the repayment schedule is variable. Business loans, on the other hand, have predictable installment payments making monthly budgeting easier.
When to Consider a Merchant Cash Advance
1. You Don’t Want a Loan on Your Credit Report
If you’re trying to rebuild your credit or are planning for a big purchase, you may not want a business loan showing up on your credit report. A merchant cash advance doesn’t generally show up on your credit report.
2. You Run a Seasonal Business
Due to the repayment terms, a merchant cash advance is a good option for seasonal businesses. This is because the monthly payment amount is less when a business is making less revenue and increases when the business makes more revenue. This is in contrast to business loans that have fixed monthly payments regardless of business performance.
3. You’re an Online Merchant
Online merchants and other businesses that conduct a majority of their sales online are prime candidates for a merchant cash advance. Since businesses of this nature receive payment primarily via credit card purchases, they will be able to receive a high advance amount in return for just a portion of their daily credit card receipts.
By using the following guidelines you can more easily decide which is best for your business, a merchant cash advance or a business loan. Another way to make things much easier for your business is to use the best PDF financial file converters on the market to convert your financial statements. The MoneyThumb tools we offer can save you a ton of time and headaches as you build and expand your business.