Business Loans vs. Merchant Cash Advances: Which Is Right For Your SME?
For small and medium-sized enterprises (SMEs) in the UK, determining the right financial solution can make a substantial difference to business performance.
Two popular options are business loans and merchant cash advances (MCA). While both provide the necessary funds to support your business, their structures, repayment terms, and suitability differ.
To help you make the best decision, let’s compare these two financial solutions and answer some common questions.
What is a Business Loan?
A business loan is a lump sum of money provided by a lender, which the borrower repays over an agreed period with interest. Loans can be secured or unsecured, but both often necessitates a strong business credit history.
Business loans are versatile, funding a variety of needs from working capital to asset purchases.
What is a Merchant Cash Advance?
Unlike a traditional loan, a merchant cash advance is a type of financing where a company sells a portion of its future credit card sales in exchange for an upfront cash sum. The repayment is a percentage of the business’s daily or weekly credit and debit card sales (known as a sweep). MCAs are often favoured by businesses with strong card transactions, such as retail, online eCommerce or hospitality businesses.
What is the difference between a Business Loan and a Merchant Cash Advance?
- Repayment Terms: With a business loan, you’ll have fixed monthly repayments, which can be easier for budgeting. An MCA has variable repayments, based on your card sales, potentially making it more flexible during quieter business periods.
- Approval and Funding Speed: MCAs can often be approved and funded faster than traditional business loans. However, same-day business loans are also becoming more prevalent.
- Cost: Business loans usually have a lower cost of borrowing compared to MCAs due to different interest rates and fee structures.
- Credit History: Business loans typically require a good credit score, while MCAs might be more accessible for businesses with less-than-perfect credit, as the focus is more on card sales volume.
What is a Merchant Cash Advance Loan?
Although the term “merchant cash advance loan” is sometimes used, it’s somewhat misleading. An MCA is not a loan but a type of advance based on a business’s future card sales. Unlike loans, they do not have a set repayment term or interest rate. Instead, the repayment is a fixed percentage of daily or weekly card sales.
What is the difference between a Loan and an Advance?
In essence, a loan is borrowed money that is repaid over a certain period with interest. On the other hand, an advance, like a merchant cash advance, involves receiving an upfront sum in exchange for a portion of future income – in the case of an MCA, future card sales. While loans generally have a set repayment schedule, advances have more flexible repayments linked to the flow of income.
Both business loans and merchant cash advances have their unique benefits. Choosing between the two depends largely on your business model, financial health, sales patterns, and specific funding needs.
For businesses with strong credit sales and a need for flexible repayment, an MCA can be a suitable choice. Conversely, a business loan could be the better option for SMEs requiring larger amounts of funding and preferring a structured repayment plan.
Remember, it’s essential to make informed financial decisions that align with your business goals. Consult with financial experts or reach out to our team at The Funding Store for a professional service.