3 Differences Between Small Business Loans and Merchant Cash Advances: SVP Funding Group Can Help Your Business
When you own a small business, one of the most important decisions you’ll make is how to finance your operations, expansion, or other financial needs. Whether you need a boost to cover day-to-day expenses, pay employees, or invest in growth opportunities, access to capital is crucial.
Two of the most common options for small business financing are small business loans and merchant cash advances (MCAs). Both provide businesses with quick access to funds, but they work in very different ways. It’s important to understand the differences between them to make the best choice for your business.
In this blog post, we’ll explore three key differences between small business loans and merchant cash advances, how they work, who benefits from each, and how to obtain funds quickly with the help of SVP Funding Group.
1. Repayment Structure: Fixed Installments vs. Daily Payments
One of the biggest differences between a small business loan and a merchant cash advance is how the repayment works.
Small Business Loan:
Small business loans typically have a set repayment schedule. Once approved, you’ll agree on the terms of the loan, including the interest rate, loan amount, and repayment period. Repayments are usually made in fixed monthly installments, which means you know exactly how much you need to pay each month. These fixed payments help you plan your cash flow and budgeting.
For example, if you take out a small business loan of $10,000 with a 5% interest rate and a repayment period of 12 months, you will pay a fixed amount every month until the loan is fully repaid. Your payments will be predictable, making it easier to manage your finances.
Merchant Cash Advance (MCA):
In contrast, a merchant cash advance doesn’t have a fixed repayment schedule. Instead, repayments are based on your daily credit card sales. The lender takes a percentage of your daily credit card transactions until the loan is paid off. This percentage is called the factor rate, and it determines how much you’ll pay each day.
For example, let’s say you run a small café, and you get approved for an MCA. The lender agrees to take 10% of your daily credit card sales until the full loan amount is paid off. If you have a busy day and your sales reach $500, you’ll repay $50 that day. On a slower day, if your sales are only $100, you’ll repay just $10. The payments vary depending on your daily sales, making it a more flexible repayment method for businesses with fluctuating revenue.
Key Difference:
- Small business loans have fixed monthly payments, allowing for more predictable cash flow.
- Merchant cash advances have daily repayments based on your sales, which can vary depending on how busy your business is.
2. Qualification Criteria: Credit History vs. Sales Performance
Another key difference between small business loans and merchant cash advances is the qualification criteria. Traditional small business loans often require a detailed review of your creditworthiness, while merchant cash advances are based more on your sales performance.
Small Business Loan:
To qualify for a traditional small business loan, lenders will typically assess your credit score, business history, and financial statements. Banks and other traditional lenders often require a strong credit score (usually 650 or above), collateral, and several years of operation to approve a loan. This makes it challenging for new businesses or those with poor credit to qualify for a loan.
For example, let’s say you’ve been running a small tech company for 3 years and have a good credit score of 700. If you need funding to expand, you might apply for a small business loan. The lender will look at your credit score, revenue, and operating history before deciding if you qualify.
Merchant Cash Advance:
On the other hand, merchant cash advances do not rely heavily on your credit score. Instead, lenders are more focused on your daily credit card sales and cash flow. If your business processes a steady stream of credit card transactions, you may be able to qualify for an MCA, even if you have poor credit or are a newer business. Since the lender is repaid based on your daily sales, they’re more interested in how much revenue you generate than your creditworthiness.
For example, let’s say you operate a popular food truck that brings in $1,000 in sales each day. Even if your credit score is low, an MCA lender might still approve your application based on your consistent daily sales.
Key Difference:
- Small business loans are based on your credit history, financial stability, and business history.
- Merchant cash advances are based on your sales performance, especially daily credit card transactions.
3. Loan Amount and Fees: Fixed Loan Size vs. Factor Rates
The amount you can borrow and the associated costs can also differ significantly between small business loans and merchant cash advances. Small business loans usually offer larger loan amounts, while merchant cash advances are based on your revenue and can come with higher fees.
Small Business Loan:
With a small business loan, you typically apply for a specific amount based on what you need. Depending on the lender, you might be able to borrow anywhere from a few thousand dollars to several hundred thousand dollars. The loan amount and terms will depend on factors like your business size, financial stability, and the type of loan you’re applying for.
While small business loans usually have lower interest rates, there may also be fees such as application fees, origination fees, or prepayment penalties. These costs are typically disclosed upfront, and you’ll know exactly how much you’ll be paying over the life of the loan.
For example, you may apply for a $50,000 loan to purchase new equipment for your business. After a detailed review of your application, the lender might offer you an interest rate of 6% with an additional origination fee of 1%. You’ll repay the loan in monthly installments over a period of 5 years.
Merchant Cash Advance:
In contrast, merchant cash advances tend to offer smaller amounts of financing, often ranging from $5,000 to $250,000. The amount you qualify for is directly tied to your daily credit card sales. However, the downside is that MCAs come with higher factor rates instead of traditional interest rates. The factor rate determines the total cost of the loan, which can range anywhere from 1.1 to 1.5.
For example, if you’re approved for an MCA with a factor rate of 1.3, and you borrow $20,000, you would end up paying back $26,000 ($20,000 x 1.3) over the term of the loan. While this may seem higher than the original amount borrowed, remember that repayments are daily, and the amount repaid will fluctuate based on your daily sales.
Key Difference:
- Small business loans offer larger loan amounts with fixed interest rates and clear fees.
- Merchant cash advances offer smaller amounts but often have higher costs due to the factor rate.
Who Can Benefit from Small Business Loans and Merchant Cash Advances?
Both small business loans and merchant cash advances can be beneficial to certain types of businesses, depending on their unique needs and circumstances.
- Small Business Loans: Traditional loans are a great option for businesses with a solid credit history and the ability to repay a fixed monthly amount. If your business is established and you have steady cash flow, a small business loan can provide a larger amount of funding with a more structured repayment plan. Examples of businesses that benefit from small business loans include those in manufacturing, retail, or construction.
- Merchant Cash Advances: Merchant cash advances are ideal for businesses that have steady credit card sales but may not qualify for a traditional loan due to poor credit or lack of operating history. If your business is seasonal or has fluctuating revenue, an MCA offers the flexibility of repayments that adjust with your sales. Examples of businesses that benefit from MCAs include restaurants, retail shops, and service-based businesses that rely heavily on credit card transactions.
How SVP Funding Group Can Help Your Business
Whether you’re considering a small business loan or a merchant cash advance, SVP Funding Group can help guide you through the process and secure the financing that’s right for your business. With their streamlined application process and personalized service, you can get the funds you need quickly.
Here’s how SVP Funding Group makes obtaining funds easier:
- Fast and Simple Application: You can apply online in just a few minutes. SVP Funding Group makes the process easy, so you don’t have to waste time filling out long forms.
- Flexible Loan Options: Whether you need a traditional small business loan or a merchant cash advance, SVP Funding Group offers both options with competitive rates.
- Quick Funding: Once approved, funds can be deposited into your account in as little as 1-2 business days, giving you fast access to the capital you need.
- No Collateral Required: For many of their loan products, SVP Funding Group doesn’t require you to put up collateral, so you can access funding without risking your assets.
If you’re ready to get started, apply today with SVP Funding Group and find the financing option that works best for your business!
Conclusion
When choosing between a small business loan and a merchant cash advance, it’s important to understand the key differences in repayment structure, qualification criteria, and costs. Both options can provide quick access to funds, but they work best for different types of businesses with unique financial needs.
If you’re looking for predictable monthly payments, a small business loan may be the best option for you. If you have fluctuating sales or need a
more flexible repayment plan, a merchant cash advance could be a better fit.
Regardless of which option you choose, SVP Funding Group is here to help you navigate the process and secure the financing your business needs. Apply now to get started and take your business to the next level!
Author by Vitas Changsao
