Business Loan or Merchant Loan? Understanding Loan Options for Your Business

A merchant cash advance, or a merchant loan, is a type of short-term business financing option. In this arrangement, an MCA lender releases a lump sum of cash to the business, backed by future sales. The funding is repaid with regular payments calculated using a percentage of credit card or debit card sales. MCAs are not formally considered loans by lenders because they describe a commercial agreement where the borrower sells future credit card sales to the funding provider.

Payments are made until the agreed amount is paid in full, so the length or term of the transaction depends on sales and the amount of money that was borrowed. Typically, a merchant loan will be repaid in less than one year, but many lenders are willing to offer more flexible terms.

Merchant cash advances can include customized financing structures with no fixed repayment term. The advance is repaid with daily, weekly, bi-monthly, or monthly payments. Since the payment amount is set on a percentage of future sales, the amount due is lower when sales are less than expected. In periods where sales exceed expectations, the payments are higher, so the funding is paid off faster.

What are the benefits of a merchant loan?

The primary advantage of a merchant cash advance over a business loan is that it offers very quick business funding, with a less rigorous application process.

This can be helpful for small business owners who have immediate working capital needs or operate in an industry with regular cash flow fluctuations.

Merchant cash advances are secured by future debit or credit card sales of the business so they are a lower risk for lenders and a great option for businesses that may have been turned down when applying for other financing options. MCA lenders work with businesses that have both good credit and bad credit. Since future sales secure the advance, there is no need to offer collateral or a personal guarantee.

It’s important to note that this type of business cash advance is not federally regulated like commercial real estate loans, term loans, or other funding methods, so it’s important to speak with your lender and researchmerchant cash advances before applying. Merchant loans come with higher interest rates than traditional term loans but offer higher approval odds and the kind of convenience that some business owners need.

What are business loans?

Business loans provide a lump sum cash payment upfront with pre-set repayment terms. There are many different types of business loans like short-term loans, equipment financing, and business acquisition loans. Some entrepreneurs opt to finance their business with revolving credit, like a business line of credit or a business credit card. Some of the most popular types of financing for small businesses include SBA loans, invoice factoring, and business term loans.. Some entrepreneurs opt to finance their business with revolving credit, like a business line of credit or a business credit card. Some of the most popular types of financing for small businesses include SBA loans, invoice factoring, and business term loans.

SBA Loans

The Small Business Administration (SBA) helps small businesses get financing through SBA Loans. The SBA doesn’t lend money directly to businesses, but it works with lenders to guarantee a portion of the loan. Borrowers interested in an SBA loan complete an application and receive funds from a traditional or online lender. You can use the SBA lender search to find SBA lenders.

There are several financing programs offered through the SBA. Each program offered through the U.S. Small Business Administration comes with a unique borrowing maximum and repayment terms. Some of the more common SBA loans are:

• SBA 7(a) loan: The most common of the SBA loans funds loans up to $5 million for many business needs, including working capital, refinancing, equipment, and real estate.
• SBA Microloans: The preferred solution for startups, these loans offer up to $50,000 for working capital to a small business and must be repaid within six months.
• Economic Injury Disaster Loan (EIDL): These low-interest SBA disaster loans cover physical and economic losses with similar eligibility guidelines to the PPP loans that became popular during the COVID-19 pandemic.
• SBA Express Loan: These loans offer flexible financing for business needs up to $350,000

SBA loans are ideal for businesses that can meet the approval requirements and are not restricted in the timing of their funds. Since the loan amount is backed by the SBA, borrowers pay lower interest rates than traditional loans. This isn’t a quick business funding option, but the more complicated process may be worth it for some small business owners.

Invoice Factoring and Invoice Financing

Invoice factoring and invoice financing offer business cash advances for small businesses that are new or still need to build up a business credit history. Since traditional financing is approved based on a combination of personal and business credit scores, financing programs like invoice factoring and invoice financing can help new businesses improve their credit scores.

While similar programs and terms are often used interchangeably, invoice factoring and invoice financing are different.

Invoice factoring is when a small business sells its unpaid invoices to an invoice factoring company for up to 95% of its value. The invoice factoring agent then collects the invoices and sends the balance to the business, less fees, which are calculated at a set factor rate.

Invoice financing is when a business takes out a line of credit using unpaid invoices as collateral. The borrowing business remains responsible for collecting outstanding balances.

They’re similar to merchant cash advances in that they offer quick business fundingmerchant cash advances, however, these business cash advances are financed by accounts receivable. That is, you pay via sales you’ve already made, rather than future sales.

Business Term Loans

Small business term loans are a traditional type of financing where the borrower receives a lump sum payment upfront and repays the loan over a pre-determined amount of time at either a fixed or variable interest rate. Fixed interest rates stay the same throughout the life of the loan, while variable rates change in conjunction with market rates. Short-term and long-term loans can be obtained through a traditional bank or credit union or with an online lender.

Term loans do not restrict the use of funds, so businesses can borrow funds to purchase equipment or real estate, increase working capital, refinance, debt consolidation, or develop growth strategies. Depending on the business's creditworthiness, borrowers may be required to make a down payment, leave a personal guarantee, or secure the loan with collateral.

What are the benefits of business term loans?

Business loans, like SBA and term loans, can provide a large lump sum of funds for qualifying businesses. They are approved for larger loan amounts than some short-term financing options like MCAs, invoice factoring, lines of credit, and other solutions. Business term loans allow borrowers to budget accordingly because the repayment terms are fixed and agreed upon at the beginning of the loan.

Both traditional lenders and online lenders issue business term loans. Online lenders allow business owners to apply online, upload required documents and receive a decision and funding quickly. Making regular, on-time payments on a term loan can help a business improve its credit score and become eligible for larger loans and higher credit limits.

Is a business loan or merchant cash advance better?

Term loans and merchant cash advances can each provide great financing opportunities for small businesses. Deciding which action is best for your business depends on a few factors.

Term loans may be the best option for businesses that:

• Have established credit history: Businesses that have good to excellent credit scores and steady income can qualify for a low annual percentage rate (APR) with a term loan.
• Need a large amount of funds: Term loans can provide sizable funds upfront, allowing the borrower to make a large purchase, hire new staff, expand the business, or refinance other high-interest business debts.
• Want flexible repayment terms: Businesses that apply for a business loan can review several loan options, interest rates, loan repayment terms, and payment amounts.

Merchant cash advances are best suited for businesses that:

• Do not have a good credit history: New businesses or small businesses without good credit can get approved for a merchant cash advance without a hefty down payment or collateral.
• Need quick business funding: Merchant cash advances typically fund faster than traditional bank loans.
• Have increasing sales: Growing businesses find merchant loans to work well when their sales are on an upward trend, allowing the loan to be paid off quickly as credit card revenue increases.

Where to find business lending?

If you have decided that a business loan, merchant loan, or merchant cash advance is the best option for your business, finding a lender is the next step.

There are many options for small business financing, but finding the best place to get a business loan doesn’t have to be stressful. Most business owners can get financing with either a traditional bank or an online lender.

Traditional banks offer many financing options for small business owners. Borrowers can find a traditional bank to work with by contacting a local branch or credit union. This is a great choice for businesses looking for a bank loan with lower interest rates and fixed repayment terms. However, traditional banks have strict approval requirements, so businesses with less than perfect credit or new businesses risk being turned away by big banks. Traditional banks have a formal application process, so the time between qualifying and being funded can take up to two months.

Alternative lenders, or online lenders, are a great option for businesses interested in applying for a merchant loan. Online marketplaces allow borrowers to compare and contrast different funding options and can offer a fast-funding process for business owners who need financing Online lenders look beyond credit scores when determining creditworthiness and offer many types of loans depending on business needs. Borrowers seek out online lenders and complete the loan application process without ever having to leave home.

Regardless of the type of lender best fits your business financing needs, we recommend checking reviews and asking some questions before applying. Ask the lender what types of small business loans they offer, about repayment terms, and the application and approval processes.

Bottom Line

Running a business includes monitoring the financial health of the organization and adjusting the business plan whenever necessary. Sometimes adapting means exploring the options of business financing. For Victor Alacazar from Ohio, adapting happened very fast when he was able to secure a $20,000 cash advance

There are many ways companies can finance their business goals. The option that is best for your business will depend on multiple factors, including time, loan amount, and creditworthiness. If you aren’t sure if a merchant cash advance or a term loan is right for your business, reach out to an expert to discuss the potential benefits of each.

FAQs

What is a business loan?

A business loan is a payment made by a lender to a business borrower to fund business purchases. There are many types of business loans, including commercial real estate loans, business term loans, and SBA loans.

What is a merchant cash advance?

A merchant cash advance (MCA) is a commercial agreement in which an MCA lender pays an upfront, lump sum amount of cash to a borrower in exchange for a percentage of future sales. Since this is a commercial arrangement that is not regulated by traditional government means, it’s not technically considered a loan.

What’s best for quick business funding?

While some online lenders offer fast funding for traditional business term loans, merchant cash advances tend to offer faster funding than business loans.

How do I get business funding?

There are many ways to get funding for your business. Traditional lenders and online lenders both offer term loans and other conventional financing. If you’re looking for an emergency influx of cash fast, MCA lenders may be a better choice. Do some research online to determine requirements and apply online.

What are the drawbacks of MCAs?

While merchant cash advances can provide faster funding and more flexible repayment than many business loan types, they can sometimes have opaque terms. If you have a high factor rate and a frequent repayment schedule, the payments may hamstring your business when it’s performing well. Likewise, high factor rates and strong performance may lead you to pay more than you would if you had a traditional interest rate.

Frequent searches leading to this page

merchant cash advance, business cash advance, mca lenders, business term loans, quick business funding