Merchant Cash Advances vs. Traditional Loans: Which is Better?
The pros and cons of Merchant Cash Advance vs bank loans allow businesses to get access to funds quickly and easily. They do this by purchasing future credit card sales at a discount. Payments are based on a percentage of your daily sales, so they can be more flexible than a loan.
However, they also have higher costs than traditional loans. This is due to their shorter repayment periods that are directly linked to your sales performance.
“At BitX Capital, we understand that every business is unique, and so are its financing needs. Choosing between a Merchant Cash Advance (MCA) and a traditional bank loan can be complex. While MCAs offer speed and accessibility, especially for those with less-than-perfect credit, they often come with higher costs.
Bank loans, on the other hand, typically have lower interest rates but require more stringent qualifications and a longer approval process. Our loan specialists take the time to listen to your specific goals and circumstances. We’ll guide you through the pros and cons of each loan product, explain the fine print, and connect you with the right lender and loan that truly fits your business.
Don’t navigate this alone – let BitX Capital help you make the best decision for your future.” – Todd Rowe, President of BitX Capital
What Are Traditional Term Loans?
A traditional business loan is a financing arrangement with a bank or another lender that provides an upfront lump sum to a small business in exchange for fixed payments over a specific period. The most common types of traditional loans include bank-rate business loans, venture debt, and SBA loans.
Merchant cash advances, or MCAs, are a type of financing that can be easier to qualify for than traditional loans because they’re based on sales instead of credit scores. However, this flexibility can also lead to higher costs than a traditional loan.
For repayment, merchant cash advance firms typically debit a set percentage of your company’s daily or weekly sales automatically until you fully repay the advance plus fees. This percentage is the holdback or retrieval rate.
This structure can have some drawbacks, including inconsistent payment obligations that may hamstring your business when it’s performing well.
Types of Traditional Bank Loans
While advertisers often tout merchant cash advances as a short-term funding solution, they are one of the most expensive options. They can erode your profits and bury you in debt long-term.
With traditional bank loans, you can qualify for funds based on your credit score and financial statements. However, many conventional loan programs require a lengthy application process and collateral requirements.
Conventional lenders are also subject to federal and state usury laws, which set maximum interest rates on certain types of loans. In contrast, MCAs aren’t subject to these regulations, so providers can charge higher rates without violating the law.
This has opened the door for a new industry of online lending companies that offer alternative resources to traditional business loans.
The Difference Between Short and Long-Term Loans
Merchant cash advances vs bank loans typically require more documentation and a longer approval process. In addition, they may have strict credit requirements and a fixed repayment period. They also typically require collateral like personal assets or business property.
Merchant cash advances are a much more flexible financing option that allows businesses to meet immediate funding needs. However, they are usually more expensive than traditional financing. This is because merchant cash advance lenders charge a factor rate and hold back a certain percentage of your business’s monthly sales.
Because of this, it is important to consider your company’s growth stage and its current cash flow when determining how much of a merchant’s cash advance to take.
Beware of encouraging your customers to pay in cash to avoid paying the holdback amount, as this could violate your contract with your merchant cash advance provider and result in additional fees.
Blurring the Line Between Merchant Cash Advances and Bank Loans
While traditional loans may seem like the better choice, merchant cash advances offer some distinct advantages. They require less paperwork and can be approved faster than a business loan. Additionally, they can be accessed by businesses with less-than-perfect credit.
However, these benefits come at a cost. Merchant cash advance fees such as factor rates, origination, administration, underwriting, and funding fees can add up quickly.
A lender or provider purchases a percentage of a company’s future credit card sales with a merchant cash advance. The company then repays the advance proportionally to its daily or weekly sales until it pays off the full amount. This sales-based repayment makes merchant cash advances easier to manage than regular loans.
However, the repayment terms with merchant cash advances are often more rigid than with traditional loans. This can make it harder for a business to manage unexpected financial needs or expenses.
Cash Advance or Loan? Which is Right for My Business
Initially, merchant cash advances became popular among small business owners seeking an alternative to traditional loans. They have a quick application process and are often approved based on daily credit card sales rather than a lengthy review of financial records and credit history.
A lender pays your company a lump sum of cash with an MCA in exchange for a percentage of future sales. The lender then debits your business’s ACH account a fixed amount daily or weekly until you repay the advance plus fees.
Despite their popularity, merchant cash advances do have some drawbacks. For example, they can be one of the most expensive financing options. This is because they are repaid through automated daily deductions, and they don’t adhere to usury laws.
Moreover, it’s difficult for borrowers to see how much of their repayment is principal vs. interest because of the way MCAs are structured.
Benefits of MCA
They provide fast access to capital and bypass the lengthy processes required by traditional loans. However, their high costs and swift repayment terms should be carefully weighed before any business takes out an MCA.
A merchant cash advance is an alternative financing option that offers small businesses a lump sum of money based on their future credit card sales and other receivables rather than the business’s physical assets. It is also often referred to as a revenue-based financing product.
It is often offered by loan marketplaces, which offer products that are developed outside of traditional banks. This makes them attractive to small businesses that may not have access to loans or other funding sources because of their size, industry, or credit history.
When you apply for a merchant cash advance, the provider will evaluate your business’s credit and debit card sales data to determine whether it qualifies for an advance. Then, it will determine the amount of money it will lend your business based on a formula called a factor rate.
This factor rate multiplies the sum of your business’s future card sales by a specific number to calculate how much you must pay back each day, week, or month until the cash advance, plus fees is fully repaid.
This payment structure can be beneficial for businesses that have variable income or seasonal sales patterns. It allows them to borrow enough money to cover their expenses in leaner months and pay less when they have higher sales. It can also benefit restaurants and other service industries that can experience a surge in demand.
Low Fico Score and Bad Credit
Lenders offer MCAs to borrowers with poor credit histories because they have lower credit requirements than traditional business loans. This makes them a good option for small businesses that struggle to qualify for other funding. They also tend to have shorter terms than typical business loans, meaning businesses best use them for everyday expenses and short-term needs.
Any type of business can use an MCA, but they are most common in retail, restaurant, and service businesses, as well as trade businesses such as electricians, plumbers, or heating engineers. Unlike traditional bank loans, they can be approved quickly and without as much scrutiny because they are backed by future sales rather than tangible assets.
In addition, they can be repaid over time as a percentage of the business’s daily sales rather than in fixed monthly installments like traditional loans. This flexible repayment option makes them popular with a wide range of businesses.
Conclusion
If you need quick access to funds, then a merchant cash advance (MCA) may seem like the best choice. BitX Capital offers a reliable and efficient way to secure the necessary capital for your business. With a merchant cash advance from BitX Capital, you can get the funds you need quickly without the lengthy application processes or strict requirements of traditional loans.
Our MCAs are designed to provide fast and flexible financing solutions, perfect for businesses facing urgent financial needs or looking to seize new opportunities. The repayment process is straightforward, with payments tied to your daily credit card sales, making it easier to manage cash flow without the stress of fixed monthly payments.
If you don’t know the difference between the pros and cons of merchant cash advance vs bank loan, call a loan specialist now to discuss your goals at 203-763-1430 ext. 101.
FAQ: Pros and cons of merchant cash advance vs bank loan
Choosing the right financing for your business is crucial. This FAQ breaks down the pros and cons of Merchant Cash Advances (MCAs) and traditional bank loans to help you make an informed decision.
An MCA is not technically a loan. It’s an advance based on your future credit card and debit card sales. You receive a lump sum upfront, and the provider takes a percentage of your daily card transactions until the advance, plus a fee (factor rate), is repaid.
A bank loan is a traditional loan where you borrow a fixed amount of money and repay it over a set period with interest.
Pros:
Fast Funding: MCAs can often be funded within a few days, sometimes even within 24 hours.
Easier Qualification: Credit score requirements are typically less stringent than for bank loans. Lenders focus more on your sales volume.
Minimal Paperwork: The application process is generally simpler and requires less documentation than a bank loan.
Cons:
Higher Cost: MCAs are more expensive than bank loans due to the factor rate, which can translate to a high effective APR.
Daily Payments: Repayments are taken directly from your daily card sales, which can impact cash flow.
Less Regulation: MCAs are less regulated than traditional loans, so it’s crucial to understand the terms and conditions.
Pros and Cons of Merchant cash advances vs bank loans
Pros:
Lower Cost: Bank loans typically have lower interest rates than the effective APR of an MCA.
Fixed Repayments: You know exactly how much you’ll be paying each month, making budgeting easier.
Builds Credit: Successfully repaying a bank loan can help improve your business credit score.
Cons:
Slower Funding: The approval process for a bank loan can take weeks or even months.
Stricter Requirements: Banks require good credit scores, strong financials, and often collateral.
More Paperwork: The application process is more complex and requires extensive documentation.
Need for immediate cash: If you need funds quickly for an emergency or time-sensitive opportunity.
Limited credit history: If your business has a less-than-perfect credit score.
Strong and consistent card sales: If you have high and predictable credit/debit card transactions.
Good credit score and financials: If your business meets the bank’s lending requirements.
Need for a larger loan amount: Bank loans typically offer larger loan amounts than MCAs.
Desire for lower-cost financing: If you’re looking for the most affordable option.
Ability to wait for funding: If you don’t need the money urgently.
The best choice depends on your specific circumstances. Consider your:
Funding needs: How much money do you need?
Timeline: How quickly do you need the funds?
Creditworthiness: What is your credit score and financial history?
Cash flow: How will repayments impact your cash flow?
It’s always recommended to consult with a financial advisor or loan specialist to discuss your options and determine the best financing solution for your business.
