Any type of business, irrespective of their credit scores, can get merchant cash advances through various companies. Small business loans are loans that are provided by banks and other lenders, and guaranteed by the Small Business Administration (SBA). Since there’s a government guarantee in the event of default, banks and other lenders often give out such loans that they wouldn’t have otherwise given.
Merchant Cash Advances: It is a form of funding that is not a loan. It was originally regulated as a lump-sum payment mode to a business in exchange of future credit or debit card receivables for an agreed upon percentage. It is easy and quick way to get business funding even if you have a bad credit score.
Small Business Loan: It is the kind of loan provided to small businesses for several purposes by a lender. In other words, it is an amount of money small business person borrows to start or run a small business.
There exist some basic differences between merchant cash advances and small business loans, which are as follows:
- Types of loan: Merchant cash advances aren’t loans. Instead, they are advances against potential receivables. Such cash advances provide you with the capital you need and deducts a percentage from your credit and debit card sales with the purpose of repaying the advance. Small business loans, on the other hand, are SBA-guaranteed loans disbursed by banks and other lenders.
- Amount you receive: In case of cash advances, the entire amount is typically transferred to your account within 7 to 10 days. However, when you opt for small business loans, you won’t get the entire amount at one go. You may need to provide invoices or purchase orders to get funds. Sometimes, the lender will make the check payable to your vendor, while in some other cases, you would need to make payments from your present funds and ask the lender for reimbursement.
- Guarantees/Collateral: You won’t need any collateral or personal guarantees to qualify for cash advances. But SBA loans need personal guarantees. It could be someone owning 20% or more of the business. In case the business assets cannot back the loan, you will have to pledge your personal assets, including some that you own jointly with your spouse, for the purpose. If you pledge jointly owned assets, your spouse may have to sign on your loan.
- Process speed: Approval for cash advances is often done fast, within 24 hours, while the money takes a maximum of 7 to 10 days to be transferred into your account. Compare this to the SBA loans where the government is involved (as it guarantees the lender in the event of default) and the process is a lengthier one, which involves relatively more time and extra paperwork. No wonder that the faster and easier process of cash advances make them the preferable choice for many.
- Interest rates: With cash advances, you don’t need to deal with a fixed monthly payment. Since your payback depends on your monthly sales and cash flow, you will end up paying less when you are earning less. However, SBA-guaranteed loans may have a steeper interest rate as compared to a conventional loan. Additionally, though lenders of SBA loans won’t charge several fees including application, processing and brokerage fees, there’s an annual servicing fee on the outstanding loan balance. However, a benefit of such loans is that you can extend the loan’s term. Thus, an SBA loan that was originally repayable in 5 years could be extended to 7 years with the SBA guarantee.
Now that you know the differences, take your pick from SBA loans and merchant cash advances based on what suits your needs and budget the best.
About the Author:
Hello! I am, Ethan Benjamin, a representative of 48 Factoring Inc. (https://www.48factoring.com). I am fond of writing as this is the best way one can express his thoughts. Being in the Finance industry, I have been writing articles related to current financial trends. I am currently focusing on creating unique and useful content for my company and the audiences. I love reading and sharing everything about this wide industry that I am associated with. For more update connect with me on Twitter and Facebook.
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