Guiding the world of business funding can be tricky, especially with so many options out there. As a loan expert, We’re here to make it easier for you to understand and choose the right path for your growing business. Here, we will discuss:
✅ Understanding MCAs and Traditional Loans: What are they, and how do they work?
✅ Merchant Cash Advance Vs Loan: How does an MCA differ from a traditional loan?
✅ Pros and Cons: The good and the not-so-good about MCAs and traditional loans.
✅ Consideration: When they consider MCA and Traditional Loans for businesses.
1. Merchant Cash Advance: It’s all about investing in a business’s potential. Companies receive immediate working capital in exchange for a portion of their future earnings.
This advance is then paid back through a set percentage of the daily credit and debit card sales the business makes, continuing until the total amount of the advance is repaid.
According to the Federal Reserve, 8% of small businesses seek financing through merchant cash advances instead of other categories of loans.
It’s a straightforward, efficient way for businesses to gain the funds they need now, using their future sales as the pathway to repayment.
2. Traditional Loan: A loan is essentially a financial boost provided by lenders to businesses, with the agreement that it’ll be paid back over a set period, along with some extra – interest.
This process isn’t one-size-fits-all; there are various types of loans, each with unique characteristics and benefits, which we’ll explore in depth.
For instance, did you know that big banks’ small business loan approval rates were about 13.5% in 2021?
This statistic highlights the importance of understanding different loan types to increase your chances of securing your business’s financial support. Here are they are:
|Long Term Loans
|Short Term Loans
|Loans with repayment periods from five to over ten years give businesses a more extended timeline for repayment.
|Short-term loans are smaller, have higher interest rates than long-term loans, and feature a payback period ranging from a few months to a few years.
|Long-term loans make more sense for established businesses with a stable business credit history that is looking to expand or acquire another company.
|Short-term loans often depend on your credit and may need collateral if obtained through a traditional bank.
Refer to the below table for a quick summary of the key differences.
|Merchant Cash Advance
|Future sales purchase
|Loan for funds
|Process of Approval
|Fast and hassle-free
|It is complex and requires collateral
|Remitted upon daily or weekly sales
|Monthly payment with a fixed amount
|Flat fee are more heightened than traditional loans
|Lower than cash advances
|Businesses with lower credit scores may get the privilege
|Requires good credit history and financial situation
|Businesses with irregular income or seasonal sales
|Businesses with predictable cash flow and steady income.
In deciding between an MCA and a traditional loan, consider your business’s immediate needs, financial health, and goals.
MCAs provide fast access, but are costlier and riskier for cash flow. At the same time, traditional loans are more affordable and structured but need a solid financial background and offer less repayment flexibility.
Weigh these aspects for a choice that fits your financial strategy and growth plans.