In this week’s blog, we investigate how a merchant cash advance vs a business bank loan can help many small businesses to grow their business.
For many businesses that aspire to grow and develop this can be somewhat hindered by the inability to generate funds through the usual banks and lenders. There are, however, other options for business financing that Card Cutters can help you with – this is known as a Merchant Cash Advance (MCA).
What is a Merchant Cash Advance?
In existence since the 1990s, an MCA exists as a way of financing that steers away from the traditional option of borrowing money from a bank.
Funding is given to the business in a lump sum, which is then paid back based on business income rather than a standard lump sum based on APR. The MCA is repaid using a percentage taken from credit and debit card sales made by the business or alternatively from credit card income.
How is a Merchant Cash Advance different from a bank loan?
Alongside the different repayment structures, the major difference is that an MCA is not classed as a loan, but as a percentage of future revenue.
Due to this difference, the usual regulations that surround a bank loan for a business are not necessary, something which small businesses or those with poor credit scores can find incredibly useful.
The need to be in some way ‘approved’ by a bank is removed. Alongside this comes the fact that the large amounts of paperwork can be dispensed with, meaning that the process can be streamlined and completed quickly. Decisions will be made largely on your business viability, income and projected income. You can find out more by visiting our partner Boost Capital.
Is a Merchant Cash Advance a good idea?
As well as business that has poor credit ratings, those that have little trading history can benefit greatly from an MCA, which may give them money a more cautious bank would not. Business plans, forecasts, or detailed reasons as to what the money is needed for are not required, which presents businesses with a sense of freedom, and allows them to develop in areas they perhaps otherwise may not be able to.
Because repayments on an MCA come as a percentage of card sales, the payment levels will, of course, vary from month to month, which can be incredibly helpful to businesses in their early years of trading.
For example, if your business has a bad month with income generated the amount you replay will change to reflect this. Likewise, if your business has a great income one month then you will pay back more towards your finance.
For many small businesses, especially those that are seasonal this structure can work well. Not having a loan on a credit report can also be a positive for a lot of businesses who may be looking to rebuild credit or perhaps make a large purchase in the future.