What’s the Difference Between a Small Business Loan and a Merchant Cash Advance?

Running a business isn’t easy. Taking care of customers is difficult enough, but there’s a whole dimension to your business that customers never even see. Inventories need to be restocked, equipment needs to be repaired and upgraded, and staff needs to be paid. There’s a lot of truth to that old saying, “You gotta spend money to make money.” But when you find yourself low on working capital, how can you keep your business moving forward?

Small business owners are faced with a confusing number of funding options, so many that it can be hard to sift through all the offers and know what’s the right one for your business. So let’s break down the difference between the 2 major types of small business financing:

Small Business Bank Loans

This is the most common way people look for working capital, and may be the one you’re most familiar with. After submitting your application to the bank, they will examine a number of factors including your credit history and the amount of collateral you can put up. If your application is approved, you’ll receive your lump sum bank loan and be expected to pay it back by a certain date. Usually, the loan will come with fixed repayment installments that must be met or penalties can occur.

Who it’s best for: Small businesses with totally predictable monthly sales, strong credit history, and own their own real estate that they can put up as collateral.

Merchant Cash Advances

Many merchants don’t know about the existence of this funding option. Merchant cash advances differ from small business loans in that they are a purchase of future credit card sales. Unlike a traditional loan, it isn’t based on your personal history and instead on how much business you’re doing. This makes it ideal for business owners who don’t have perfect credit or who don’t have collateral to put down. Instead of fixed payments, you repay a set percentage of your credit card sales – when business is slow, you pay less and when business picks up, you pay more off. This is also advantageous for seasonal businesses or businesses whose monthly receipts tend to vary.

Who it’s best for: Small businesses whose receipts vary month to month, owners with less-than-perfect credit history, have no collateral or would just prefer more flexibility.

In the end, take a look at your business’ financial trajectory and decide which funding option you think best fits your situation.

Merchant Cash Advances and Working Capital Basics For Small Business Financing

It is frequently a good idea to get back to basics, and this is particularly appropriate for small business owners when they are reviewing if they can increase their cash flow with business cash advances while reducing processing costs. Because many businesses have experienced both decreased sales and increased difficulty in obtaining bank financing, this review of basic working capital management processes should be helpful to most commercial borrowers. The possibility of reducing a significant business expense is likely to be appealing to even the most successful small businesses.

While they will not be discussed here, there are other working capital financing options to consider for a business which does not accept bank cards from customers as a payment option. A minimum monthly volume of bank card sales which typically varies from $5000 to $10000 is needed in most cases to obtain business funding based upon credit card receivables factoring. A lump sum payment is received based on projected future credit card processing transactions when merchant cash advances are obtained by a business. As credit card purchases are processed, the business financing is repaid automatically and gradually (typically covering about seven to eight months). Because they do not have another reliable commercial funding source, this strategy for obtaining working capital is used by many diverse businesses. The need to consider this option has also increased because banks are routinely reducing or eliminating business lines of credit in almost all areas for small businesses.

This might be the perfect opportunity to review the cost structure currently in place for a business because this approach to working capital management is tied so directly to credit card processing activity. Many small business owners chose their credit card processor based upon a recommendation from a colleague or banker. It is not unusual to hear that costs or terms were not reviewed thoroughly before signing a processing agreement.

As indicated, future credit card processing activity is used to repay a business cash advance. A portion of each transaction is automatically allocated toward repayment. In order for this to happen, the processor must agree in advance to handle it properly. Not all credit card processing providers will agree to help with the merchant cash advance repayment process. When this occurs, alternative processors can usually be arranged with minimal impact on daily business operations. A common occurrence is for a small business to realize significant cost reductions when replacing one credit card processing provider with another because costs were often overlooked when the initial agreement was signed.

One of the primary precautions to observe when a small business owner is considering a business cash advance is to ensure that the company providing the business financing does not rush to change credit card processors before determining if they can complete the desired working capital financing. Attempts to change processing arrangements immediately are a clear indication of one of the most serious abuses seen during recent years for companies appearing to offer merchant cash advances. An initial evaluation of whether they can provide financing and in what amount is a more normal and appropriate approach for the commercial funding provider to take. Checking with the existing processor to determine their ability to facilitate repayment of the working capital to be advanced to the business borrower would then be the next step if the initial findings were acceptable to the business. Even if their current processor is willing to work with the business cash advance provider, businesses should consider asking for a review of cost saving opportunities involving their credit card processing.

Some Options for Small Business Financing

One of the major problems with being a small business is that the business owner will invariably run into difficulty with the access to and securing of funds from commercial lenders who will be somewhat deterred by the lack of market presence of the business and so will be less inclined to issue a loan.

As a result then, this means that the potential growth of the business is effectively retarded outright, as without sufficient levels of working capital at its disposal, it cannot hope to grow, develop and expand to ensure that it attracts a sufficient portion of the available market to render it a successful venture.

Being a small business is a risky affair indeed, and the reason for this is that the market will already be controlled to varying degrees by those companies that are already firmly established within a community, and which have managed to cultivate a degree of goodwill among their customers. These companies have the advantage of a steady stream of income, thereby ensuring that they have good cash flow, which in turn means that they are fully solvent and as a consequence then, self-sufficient.

A small business on the other hand will need to actually prove their worth to both the lenders as well as the customers whom they are seeking to attract, although it should be noted that this is oftentimes, a task much easier said than done.

Regrettably then, the range of small business financing options that are actually available are very narrow indeed, and so the owner of a small business may have to make some very tough decisions as to what exactly they are willing to sacrifice in order to ensure that their business will increase and blossom as a whole.

One option that the business owner may want to seriously consider is the taking out of a small business loan. This would mean that the business would be able to get his hands on some much needed capital in a short period of time, without having to relinquish any control of it, and so once the loan has been paid off in full, then the company would not be committed to any more or further obligations.

This is of course, assuming that the business will be actually able to get access to a loan, which is a fairly challenging feat in of itself it should be noted. Another option is

Another avenue to explore is small business grants provided by the government. The government is fully aware of the remarkable benefits that small businesses will bring to the economy as a whole as it means that services are much more competitive which in turn helps to stimulate greater demand for associated supplies.

Venture capitalist companies are another option for small business financing, the only problem here is that they are rather demanding as to what they expect in return for their initial investment and so the business owner must be prepared to relinquish a sizeable portion of their company away.