If your small business needs a cash injection, there are a couple of options open to you. While business loans might not be viable for your company or the time you have, merchant cash advances or personal payday loans are both worth considering. However, both these methods of borrowing money have different benefits for different businesses.
If you’d like to know more about merchant cash advances and payday loans, as well as how they can benefit your business, this post is for you. Below, you can find out a little more about these borrowing methods and who they work for. Then you’ll be able to assess your small business’s needs and decide which is right for you.
What Are Merchant Cash Advances?
First, let’s dive into merchant cash advances for small businesses.
A merchant cash advance is a loan that small businesses can take out, to be paid for with future earnings. The business that is borrowing the money receives the cash immediately in a lump sum. This is then paid back when customers pay for their goods or services with a card.
If your business takes payment by card machine or online, you’ll be able to apply for a merchant cash advance. The lender will take a small portion of each card payment, as they work in partnership with the card providers. This money from card receipts acts to pay off your loan. Interest rates still apply, so you will pay off more than you originally borrowed.
The amount that can be borrowed is determined by the average sum of card payments you have taken in the last 6 months - 1 year. The lender will then use this average to determine how much your business can feasibly borrow and pay back. They will then draw up a repayment plan, based on your estimated card earnings.
The Advantages of Merchant Cash Advances
Many small businesses opt for merchant cash advances because they offer a lot of freedom and flexibility, with very little of the stress associated with taking a loan. Below, we’ve listed some of the benefits of merchant cash advances, so you can see if it’s the right choice for you.
- Easier to obtain than business loans - One of the main benefits that draw small businesses toward merchant cash advances is the high likelihood that they’ll be approved. If you’ve been rejected for a business loan, you will likely still be eligible for a merchant cash advance. Not to mention, the borrowing process is much faster than business loans and requires a lot less paperwork too.
- Great for small businesses - Following on from the above, merchant cash advances do not rely on credit history or need to be secured against your assets. This means, that if your small business has no credit history or few resources, you can still apply for and be granted a merchant cash advance in those testing early years.
- Very little admin - When it comes to paying back your merchant cash advance, repayments are ‘invisible’. The card terminal provider pays directly to the loan service that issued the advance, meaning you don’t have to worry about writing cheques or filling out forms. You can store your card receipts in your business’s preferred way to keep on top of your repayments.
- Slow month? No problem - Finally, the flexibility of merchant cash advances draws a lot of small businesses to this choice of loan. You won’t have to start scrimping or saving for payback, as when your loan is granted the terms of repayment will be based on your average monthly earnings. To add to this, regular repayment adapts to the number of card payments you’ve taken in a predetermined amount of time. This means the repayment amount changes to work directly with your business.
What Are Personal Payday Loans?
Now you know about the ins and outs of merchant cash advances, let’s look at personal payday loans.
Personal payday loans are loans taken out with the intention of paying them back once the borrower receives their weekly or monthly income. This means they are usually short-term and will rarely be larger than $500. This is because many states set a limit on the amount that can be borrowed in a payday loan.
If you take out a personal payday loan, you won’t need to worry about making regular payments, as these loans are usually repaid in one lump sum. The due date for repayment will be agreed upon, depending on the terms of your payday loan, but is usually around 2 weeks - 1 month.
Interest rates do apply to personal payday loans, however many states also set limits on the amount lenders can charge per $100 borrowed. The cost of your loan will be made clear to you when you decide to borrow. Some states also allow borrowers to ‘rollover’ their loan to the next month, meaning you’ll only have to pay the interest rates until the next deadline.
The Advantages of Personal Payday Loans
Personal payday loans are a favored choice for those looking for a quick cash injection that they know they will definitely be able to pay back. The highly manageable nature of payday loans, alongside many more options for customization than official loans, lead small business owners to choose this form of borrowing. Some other advantages of payday loans are listed below.
- Easy access - Similarly to merchant cash advances, payday loans have a very high acceptance rate. They don’t look at your credit history, just your current affordability, and employment, and if you’ve been rejected for other types of loans, you can still apply for and be granted a payday loan. The application process can be completed online, with the money in your account in less than 24 hours after starting the application.
- Unsecured loans - Again, like merchant cash advances, personal payday loans are unsecured. This means you don’t have to put up any of your resources or assets as collateral. They also offer a lot of freedom when it comes to how you use the money, and many lenders have very few restrictions on what you can do with the cash.
- Change your mind? - A huge benefit of payday loans is that you can cancel the loan up to 14 days after you’ve received the money and repay the loan without interest if you change your mind, as stated in the Consumer Credit Act 1974. This can be especially helpful if you’ve received some money from elsewhere and don’t want to be tied to interest repayments.
- Online management - Since most of the payday loan process is completed online, many lenders will provide you with an online management system that is available at all times. Through this, you can choose exactly what you want to borrow and how long for, find out how much you need to pay and what you’ve already paid, make early repayments, and even change the term of your loan.
Establishing Your Needs…
If you’ve made the difficult decision that you want to take out a loan, there are a few things you’ll need to consider beforehand. Getting everything in order before you start applying for loans will not only expedite the borrowing process but allow you to choose the right borrowing options for your business.
How much do you want to borrow?
You should get this figure as exactly as you can, so you’ll know when, where, and on what you’ll be spending your loan. Borrowing too little won’t help you achieve the goals you’ve set for your small business but borrowing too much can set you back further than when you applied for the loan.
How much can you feasibly pay back?
Take a look at your average monthly earnings and outgoings vs. your potential repayment plan and remember to include the cost of the loan in this equation. This will also help you get a better idea of the final amount you need to borrow, and how quickly you’ll be able to pay it back.
How quickly do you need the money?
Time to spare is not a necessity for receiving a loan, as payday loans can pay out very quickly. However, the longer you have before you need to take out your loan, the more time you’ll have to assess your needs and find the lender that will be a viable partner for your business.
Choosing the Right Loan
Now you know about the loans that are available to you, as well as what your small business needs, you can go ahead and select the loan that works for you.
Merchant Cash Advances - This type of loan is great for small businesses that want an easy and ensured method of repayment. The money can be used for legitimate business purposes, and the increased success of your business because of this will pay directly toward the loan. It may take a little longer both to be paid out and to repay a merchant cash advance, so if you have time to spare then this is the choice for you.
Payday Loans - This borrowing method is the best choice for those who know exactly how much they need and when they’ll be able to pay it back. Great for a quick payout, if you need money immediately, payday loans might be for you. You’ll be able to customize the term of the loan and manage your loan online, so you can focus on your business.
To find the best loan and lender for you, you should shop around to see what different companies have to offer. Remember to always read the fine print to find out the exact terms of your loan and repayments, and whether you’ll be able to make early repayments or not.
Sources
- https://swoopfunding.com/uk/business-loans/merchant-cash-advance/
- https://www.capalona.co.uk/product/merchant-cash-advance/
- https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/
- https://www.little-loans.com/payday-loans/advantages-and-disadvantages
- https://www.cashlady.com/info/payday-loan-benefits
- https://fundbox.com/blog/5-factors-to-consider-when-taking-out-a-small-business-loan/
- https://www.forbes.com/advisor/in/personal-loans/guide-to-help-you-choose-the-right-personal-loan/
One comment on “Understanding the Differences Between Merchant Cash Advances and Payday Loans for Businesses: Which is Right For You?”
Neha
Merchant cash advance loan is the most important for any small business. And eveeryone wants to get instant loan easily that i recommend to all.