Comparing MCA with Traditional Loans

Jason Hunt
December 26, 2023

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.

Understanding Merchant Cash Advance & Loan

hand shaking and money giving in same time

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 LoansShort 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.

MCA Vs. Traditional Loan: The Big Difference

Refer to the below table for a quick summary of the key differences.

Key FactorsMerchant Cash AdvanceTraditional Loan
Financing TypeFuture sales purchaseLoan for funds
Process of ApprovalFast and hassle-freeIt is complex and requires collateral
Repayment TermRemitted upon daily or weekly salesMonthly payment with a fixed amount
Interest RatesFlat fee are more heightened than traditional loansLower than cash advances
EligibilityBusinesses with lower credit scores may get the privilegeRequires good credit history and financial situation
SuitabilityBusinesses with irregular income or seasonal salesBusinesses with predictable cash flow and steady income.

What Are The Pros & Cons of Merchant Cash Advance?

Pros

  • Quick Access to Funds: Ideal for short-term needs or emergencies.
  • Flexible Repayment: Based on a percentage of sales, it aligns with business revenue.
  • No Collateral Required: Less risky for business assets​​​​.

Cons

  • High APRs: Can range from 40% to 350%, making it a costlier option.
  • Risk to Cash Flow: Daily or weekly deductions can affect business operations.
  • No Federal Oversight: Potential for less transparency and consumer protection​​​​.

What Are The Pros & Cons of Traditional Loans?

Pros

  • Lower Interest Rates: More cost-effective for long-term borrowing.
  • Structured Repayment: Predictability in budgeting.
  • Suitable for Major Investments: Ideal for long-term business growth​​​​.

Cons

  • Stringent Eligibility: Requires excellent credit and collateral.
  • Slower Funding: Not suitable for urgent financial needs.
  • Less Flexibility: Inflexible repayment terms and potential penalties for early repayment​​​​.

When to Consider an MCA Loan

  • Immediate Cash Needs: For urgent expenses or short-term cash flow gaps.
  • Flexibility in Repayment: Businesses with fluctuating sales.
  • Less Stringent Credit Requirements: Suitable for businesses with lower credit scores​​​​.

When to Opt for a Traditional Loan

  • Long-Term Investments: Such as business expansion or significant asset purchases.
  • Stable Financials: Businesses with a strong credit history and consistent revenue.
  • Lower Overall Cost: When the focus is on cost-effectiveness over time​​​​.

Conclusion

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.

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Jason Hunt

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