Merchant Cash Advance vs. Conventional Bank Loan

Why would a business choose a merchant cash advance over a conventional bank loan?

The glib answer to the above question would be that the merchant cash advance industry is still functioning, whereas business loans made by banks have pretty much gone the way of the dinosaur because of the ongoing global credit crisis.

But the glib answer does not tell the whole story about why a merchant cash advance may be the right choice for companies seeking business funding.

Cash Now
The merchant cash advance approval process moves quickly, usually within 48 hours. Its not uncommon for the advance to be wired into an account within that same time frame, especially if there is already a relationship between lender and borrower.

Business loans doled out by conventional banks, by contrast, can take months to obtain. In terms of pure speed of business funding, the merchant cash advance is a cheetah.

Speed is the primary reason the merchant cash advance industry has grown so fast itself, and continues to grow, even in this credit crisis. Sometimes, there just isnt time to wait on a business loan from a bank.

Flexibility
A merchant cash advance is a loan that is paid back through future sales. The merchant cash advance provider takes a cut of credit card transactions over a specified time period, until the loan is paid off. This time period can include both good and slow times for the business.

But most merchant cash advances do not insist on payment during slow times, or charge high penalties. They have agreed to be paid back through sales. When not many sales are occurring, it is generally understood that the merchant cash advance provider will have a slow month as well.

With a business loan from a bank, no such understanding is possible in most cases. The payment is either made or not made on the appointed day of the month. If the payment is not made in full, hefty penalties begin to accrue.

No Personal Guarantees
In most cases, a business owner does not have to personally guarantee business funding obtained through a merchant cash advance. The lenders relationship is explicitly with the business, and even more specifically, with the credit card sales of the business.

Business funding from a bank is customarily as linked to the business owner as it is to the business. That is, if the business loan goes into default, the business owner is on the hook to pay up.

Merchant cash advance companies, however, are taking a direct stake in the business, and do not demand personal guarantees from the business owner, nor require the posting of personal collateral, such as a home.

Things Change
The traditional argument for a business loan from a conventional bank over a merchant cash advance--a bank loan is less expensive--has also taken a hit of late. Now, cash-strapped banks are charging higher interest rates and fees, if they are even offering business loans at all.

In that sense, the credit crisis, as bad as its been for so many parts of the financial services industry, has been good for merchant cash advance providers.

Source
BusinessWeek