Merchant Cash Advance vs. Bank Business Loan

A merchant cash advance is technically not a loan. Understand the differences as you explore financing alternatives. Editors Note: This is the second in a three-part series on merchant cash advances (MCAs). Our first article explained the basics of MCAs, and this piece compares a business cash advance with conventional bank loan. The final piece answers frequently asked questions.

Like a bank loan, a merchant cash advance provides a lump sum of money when your business needs capital.

But the financing alternative is technically not a loan.

Why?

Merchant cash advance providers are not subject to the state and federal regulations that apply to banks. Rather than making loans, merchant cash advance providers purchase future receivables at a discount. You give the discount in exchange for the quick access to cash. In subsequent months, every time you make a credit card sale, a portion of the revenue is forwarded to the provider until the entire amount has been repaid.

Merchant Cash Advances and Bank Loans: How They Differ

Here are other ways in which a merchant cash advance differs from a bank loan:

• Less paperwork. The process of getting a merchant cash advance is quicker and far less onerous than a bank loan. Typically you get cash in less than a week.
• Higher approval rates. You must show a track record of debit or credit card receivables to qualify. Many business that cant qualify for a commercial loan can qualify for a merchant cash advance.
• No collateral. You do not have to put your assets, such as your home, on the line as collateral for a merchant cash advance.
• No use restrictions. You can use the money any way you choose.

• No fixed payback schedule. You repay the cash advance according to your sales. If business is down, your repayment slows.

Merchant Cash Advances Pros and Cons

Critics note that merchant cash advances are more expensive than bank loans. Yet in todays tightened credit market, commercial bank loans and credit lines are difficult to come by, especially for small retail businesses and restaurants. Merchant cash advances are sometimes the only alternatives for businesses to solve cash flow problems or get the money they need to expand.

Our next article in this series provides answers to frequently asked questions about merchant cash advances.