Demystifying The Difference Between A Merchant Cash Advance And A Loan

Demystifying The Difference Between A Merchant Cash Advance And A Loan

Each time your business is need of capital, your immediate thought may easily lead you to consider a bank loan. There is nothing wrong with this because whether you want to add more stock, inject more capital to start a business or take care of a business emergency, a bank loan will most likely bail you out. But have you ever thought of viable alternatives to business loans? Chances are, you haven’t. Take the merchant cash advance option for instance. Many retailers do not know about it yet it is one of the most reliable bank loan alternatives. To take advantage of it though, it is important to first understand how it is different from a bank loan.

Bank Loans

It is easy to figure out how bank loans work. You approach a bank, provide the necessary requirements they apply for a loan. If the application is successful, the bank will give you a lump sum of cash and require you to make monthly payments over a term. This would be with a variable or fixed interest rate over the ‘life’ of the loan.

Remember that a bank loan can be categorized as either short term or long term loan, secured or unsecured loan. Your best bet is to analyze the details so as to know which kind of perks come along with your loan. Be sure to ask questions when applying such as whether there is a grace period where you can do business before it picks up and you start servicing the loan. Ask too whether you will be eligible for a moratorium in case something beyond your control affects your business.

Lines of Credit

They are worth a mention because they are a version of short term business loans. They have a slight twist though. They are very similar to credit cards in that as soon as a lender approves your application for a specific amount, the amount remains at your disposal. They are ideal for working capital needs. They are also ideal for operating costs and inventory purchases. You can also use a line of credit for your capital or general cash flow needs if you are in a pinch because of slow sales.

Merchant Cash Advance

The first thing you need to note here is that MCAs are not loans. MCAs will provide your business with a lump sum amount upfront. But instead of requiring monthly installments, cash advance will be remitted using a certain percentage of debit card and future credit card sales. Cash advance can also be remitted using receivables that are directly withdrawn from your business’ daily credit card revenue in other words, you will not owe any funds as a merchant until you generate sales. Think of merchant cash advance as a sale of future revenue. This kind of flexibility provides relief from financial stress and difficulties that are synonymous with other types of business funding.

The perks that come along with MCAs are diverse. If for you go through a rough patch or a slow season, the collections made on your cash advance will decrease. Likewise, if sales go high and skyrocket, collections will increase. Note though that the percentage collected never changes, so your cash flow will always be stable. This is never the case with loans where you have a fixed repayment amount over a fixed period. You therefore end up with a serious dent on your bank account and cash flow anytime you go through a sales slump.