When your business is in dire need of capital, you need a quick financing solution, like a merchant cash advance or a business loan. But which option is better suited to your small business? Why get a merchant cash advance? Are business loans better? They each have advantages and disadvantages, so it’s best to compare them before you make any decisions.
Why Consider A Merchant Cash Advance Over A Business Loan?
The first thing you need to know about a merchant cash advance is that it’s not technically a loan. While you still borrow money from a lending entity, you’re actually just receiving an advance from your future sales. Is this the solution to your financing issue?
Where It Excels
The application process is quick
If you're in urgent need of money, a merchant cash advance is an ideal solution, because it enables you to fill out a quick application that will then be processed in a short amount of time. It can take as little as 24 hours, or a couple of days, at most. You can have the money in your bank account in 2 days, thus providing you with the quick capital your business requires.
You pay a fixed percentage every day
The best part of a merchant cash advance is that you don’t pay a fixed amount every month. Repayment is made in fixed percentages of your daily sales. Assuming you borrow £10,000 and agree to repay £13,000 – you will have a certain percentage of your daily sales that you need to repay. So, every day, regardless of how much you make in credit card transactions, that percentage goes back to the provider.
This is advantageous because in leaner times with fewer sales, you are not forced to pay an amount larger than you can afford. 15% of a small sale is going to be a smaller amount than 15% of a larger sale. And if business is good, then the amount repaid is higher, and you end up repaying the loan earlier.
You don’t need collateral
If your business is small or not doing very well, it may not have significant assets that you can use to put up as collateral for a secured loan. That’s where the advantage of a merchant cash advance comes up – you don’t require collateral in order to be approved for the money. This is because you already provide some sort of security through the fact that you give them access to your business’ account in order for them to take the repayment every day. Because of that, additional security measures are not needed.
Where It Falls Short
Repayment is more expensive than loans
The main drawback of a merchant cash advance is that it is very expensive, especially compared to business loan alternatives. The repayment can be double or triple that of a business loan, thus making it a very pricey financing option. Keep that in mind when making your decision and ask yourself if it's worth the expense.
You need good and constant cash flow
Because of the way repayment is set-up for this financing option, you need to have sales every day and benefit from constant cash flow for your business. Otherwise, the MCA (merchant cash advance) provider cannot take their repayment. If you've agreed to a percentage of credit card transactions, for example, you need to make a good amount of transactions.
Why Consider A Business Loan Over A Merchant Cash Advance?
Business loans aren’t free either, and will come with interest, but, like other loans, they provide options. You can get an unsecured business loan or a secured one, depending on your financial status, you have access to more money, etc. But is it the best option for your business?
Where It Excels
Loans are up to £350,000
If you need a massive amount of money, a business loan is what you need to look into, because you can get as much as £350,000. The amount you have access to depends, of course, on your business’ financial status. You need to make an assessment of your circumstances and see how much you need and whether you can get it.
You can get one for a start-up
When you're just starting out, there is no business to speak of yet, the money is short, and the financing options are slim. However, there are dedicated business loans that will enable you to borrow money specifically for your fledgeling enterprise. The government website has information for anyone who wants to apply for a start-up loan at Gov.uk.
Where It Falls Short
It requires collateral for large sums
If you're looking to get large sums of money, a business loan is not your best option, unless you've got a significant asset you are willing to put up for collateral. A large amount of money needs to be secured in some way; otherwise, you need to adjust your expectations and be satisfied with a smaller loan. That may not be enough, though.
You need a good credit history
Another drawback of an unsecured business loan is that, since you aren’t putting up collateral, you need to demonstrate great credit in order to be granted any significant amount of money. If your business is new or in financial trouble, this requirement can make it extremely difficult (if not impossible) to get a business loan.
All in all, both a business loan and a merchant cash advance can provide some much-needed help for your small business. Each option comes with advantages and disadvantages and the choice between the two is best made depending on what your needs and priorities are.
If you’re not convinced either way, you may want to read more about pros and cons of merchant cash advances and see if that provides any clarity or insight into what the right choice is for your business.