Not all the time during the year can you do great business that can give you all the cash flow that you would need to succeed and grow. There are times when you may be in dire need of funds only to keep your doors open or even expand.
As a business your best option would be to go for a Merchant Cash Advance or a Business loan. However, it is always better to understand the two thoroughly before you go out there and apply for one.
Merchant Cash Advance
A Merchant Cash Advance (MCA) is a cash advance that is given to you up-front in exchange for a certain percentage of your credit card sales volume, until the full amount has been paid for. This is best for a business such as a restaurant or a retail store that makes a lot of credit card sales on a daily basis.
A business loan (BL) is one that offers you up-front cash in return for monthly payments of fixed installments for certain agreed time period. The terms in this case are quite flexible and you can choose what works best for your business.
Differences between Merchant Cash Advances and Business Loans
Although both these options work well for businesses, they differ from each other when it comes to the following:
While a business loan is legally considered as a loan, a MCA is not. The former is generally subject to certain limitations and need to be scrutinized by the federal authorities before it is approved. You may have to look into the qualifications that the banks or the lenders look for in order to approve such loans. You will need financial statements of at least two to three years and a good credit report to get started. Also, it might take a while for you to get your loan approved in case of a BL. The MCA however is easy to get approved without much of formalities.
The Process of Approval
The approval process is quite liberal for Merchant cash advances when compared to business loans. All you need to show is that you have a good volume of credit card sales transactions. Even a statement of six months or a year should do the trick. It doesn't matter what your credit report looks like. The approval is almost instant and within two to three working days you should have the amount with you.
Business loans on the other hand require a whole lot of things for approval. The lenders look into your cash flow reports, credit reports, your financial statements and your industry metrics before deciding whether or not you deserve the loan. After analyzing the risk factor they determine the interest rate that they are going to charge you.
Speed of Funding
Although this might differ from lender to lender, MCAs generally get approved faster than BLs. However, you may have to do your research on this before going for one. Short list a few lenders and find out how long they take to approve your loan, provided you have all your documents in place. This should give you an idea which one would be better for your business.
The Process of Payment
As against BLs where in you have to pay a fixed amount every month (including interest) for a certain period of time, MCAs take a completely different route. The moment there is a credit card sales transaction at your POS, a certain percentage of the billed amount gets automatically credited into the lender's account. This doesn't affect your operating expenses in any way. Also, it doesn't matter how much money you pay every day. It all depends on the kind of business you get. Considering the ease of payment, an MCA can definitely be a better choice.
The interest rates are usually defined and published in case of business loans. The rate might even change after the initial time period. As against BLs, Merchant Cash Advance Funding would involve a higher interest rate, although not really published.
Business loans are quite transparent when it comes to costs. They involve no extra charges other than what is mentioned. MCAs however include a lot of other costs such as set-up fees, payment fees and processing fees that may even amount to more than the actual loan itself.
Both these loans have their own set of pros and cons. The better option totally depends on your business and your financial situation. If you think you will be able to afford to pay up a fixed amount every month, irrespective of the amount of money that you make, a BL would be ideal for you. However, if you are not comfortable paying up from your operating expenses, you should go for an MCA.
Yes, the costs and the interest rates are definitely higher in case of MCAs; but you may not feel the pinch of paying them. Also, in case of emergencies MCAs can prove very helpful as they are approved and processed quite fast. For business that do not have that good a credit report, an MCA might be the only answer.