What’s the Difference Between a Small Business Loan and a Merchant Cash Advance?
Running a business isn’t easy. Taking care of customers is difficult enough, but there’s a whole dimension to your business that customers never even see. Inventories need to be restocked, equipment needs to be repaired and upgraded, and staff needs to be paid. There’s a lot of truth to that old saying, “You gotta spend money to make money.” But when you find yourself low on working capital, how ...can you keep your business moving forward?
Small business owners are faced with a confusing number of funding options, so many that it can be hard to sift through all the offers and know what’s the right one for your business. So let’s break down the difference between the 2 major types of small business financing:
Small Business Bank Loans
This is the most common way people look for working capital, and may be the one you’re most familiar with. After submitting your application to the bank, they will examine a number of factors including your credit history and the amount of collateral you can put up. If your application is approved, you’ll receive your lump sum bank loan and be expected to pay it back by a certain date. Usually, the loan will come with fixed repayment installments that must be met or penalties can occur.
Who it’s best for: Small businesses with totally predictable monthly sales, strong credit history, and own their own real estate that they can put up as collateral.
Merchant Cash Advances
Many merchants don’t know about the existence of this funding option. Merchant cash advances differ from small business loans in that they are a purchase of future credit card sales. Unlike a traditional loan, it isn’t based on your personal history and instead on how much business you’re doing. This makes it ideal for business owners who don’t have perfect credit or who don’t have collateral to put down. Instead of fixed payments, you repay a set percentage of your credit card sales — when business is slow, you pay less and when business picks up, you pay more off. This is also advantageous for seasonal businesses or businesses whose monthly receipts tend to vary.
Who it’s best for: Small businesses whose receipts vary month to month, owners with less-than-perfect credit history, have no collateral or would just prefer more flexibility.