What Are Merchant Cash Advances?
A Merchant Cash Advance (MCA) is a type of financing designed to provide businesses with a cash advance based on their future sales, particularly credit card sales. In exchange for a lump sum of capital, you agree to repay the advance along with a factor rate. This is done by diverting a percentage of your daily credit card revenue. This flexible repayment structure makes MCAs popular with businesses that have high credit card sales volume. This makes them popular among retail shops, restaurants, and other service-based small businesses.
How MCAs Work as a Small Business Loan Option
MCAs offer fast funding and typically require minimal paperwork, making them an attractive choice for business owners seeking quick cash. Instead of relying on your credit score, MCA providers evaluate your eligibility based on recent sales history, usually assessing your average monthly credit card transactions and total monthly revenue. Repayment happens automatically through daily deductions, making repayment amounts vary depending on sales volume.
Benefits of Merchant Cash Advances for Small Businesses
- Fast Cash Access: MCAs provide one of the fastest ways to access capital, with approvals often within a day and funds disbursed within a couple of days.
- Flexible Repayment Terms: Since repayments are tied to daily credit card sales, businesses pay more when sales are high and less when sales are low.
- Low Credit Requirements: MCAs are ideal for small business owners with lower credit scores, as the lender prioritizes sales volume over credit history.
Drawbacks of Merchant Cash Advances for Small Business Owners
- High Cost of Capital: MCAs come with high factor rates, which can lead to annual percentage rates (APRs) exceeding 100%. This can make an MCA an expensive small business loan if not paid off quickly.
- Daily Repayments Affect Cash Flow: The daily repayment requirement can limit cash flow flexibility, particularly during slower sales periods.
- Not Ideal for All Business Types: MCAs work best for businesses with stable credit card sales, making them less suitable for businesses with inconsistent revenue or B2B companies relying on invoices.
What Are SBA Loans?
Small Business Administration (SBA) loans are government-backed loans tailored for small business owners. The SBA itself doesn’t lend money. It guarantees a portion of loans made by partner banks and lenders, which reduces lender risk and allows for more favorable terms. SBA loans include various types, but the SBA 7(a) and SBA 504 loans are most popular for general small business needs. SBA 7(a) loans are versatile, covering everything from working capital to equipment, while SBA 504 loans are ideal for acquiring major fixed assets, like real estate or machinery.
How SBA Loans Work as a Small Business Loan
SBA loans typically involve more documentation and a longer approval process. They however do offer lower interest rates and longer repayment terms. To qualify, applicants generally need to provide financial documentation, a business plan, and evidence of good credit. SBA loans often feature monthly repayment schedules with either fixed or variable interest rates, depending on the loan type. The terms for SBA 7(a) loans can range up to 10 years for working capital and 25 years for real estate purchases.
Benefits of SBA Loans for Small Businesses
- Lower Interest Rates: SBA loans offer some of the lowest interest rates available, making them one of the most affordable small business loan options.
- Extended Repayment Terms: SBA loans provide repayment terms up to 25 years, helping keep monthly payments low and manageable.
- Large Loan Amounts: SBA loans often allow for higher borrowing limits, which is beneficial for small business owners with substantial funding needs.
- Versatile Use of Funds: SBA loans can cover various expenses, from working capital to large asset purchases.
Drawbacks of SBA Loans for Small Business Owners
- Lengthy Application Process: SBA loans require more time for processing and approval, often taking weeks or even months due to extensive documentation and underwriting.
- Strict Qualification Requirements: SBA loans typically require a good credit score, detailed financial records, and a business plan. This can be challenging for new businesses or those with imperfect credit.
- Collateral Requirement: SBA loans often require collateral, which may include business or even personal assets.
Comparing MCAs and SBA Loans as Small Business Loans
| Feature | Merchant Cash Advance (MCA) | SBA Loan |
|---|---|---|
| Application Speed | Fast, usually within 24–48 hours | Slower, may take weeks or months |
| Repayment | Daily, % of credit card sales | Monthly, with fixed payments |
| Interest Rate | High factor rate, can exceed 100% APR | Low interest rates |
| Credit Requirements | Flexible, low credit score acceptable | Strict, generally requires good credit |
| Use of Funds | Working capital, flexible | Wide range: working capital, real estate |
| Loan Term | Short-term | Long-term, up to 25 years |
| Collateral Requirement | Rarely required | Often required |
Choosing Between MCAs and SBA Loans for Your Small Business
The choice between a Merchant Cash Advance and an SBA loan depends largely on your business’s current situation and future goals. Each financing option offers unique benefits but is suited to different needs.
When an MCA Might Be the Right Small Business Loan
- You Need Cash Immediately: MCAs provide fast access to capital, making them ideal for urgent needs, such as inventory purchases or unexpected expenses.
- Your Business Has Consistent Credit Card Sales: Daily repayments make MCAs a better fit for businesses with reliable sales volumes, especially those that frequently process credit card transactions.
- You Have Limited Credit History: If you don’t qualify for an SBA loan due to a low credit score or lack of financial documentation, an MCA may be a viable alternative.
When an SBA Loan Might Be the Right Small Business Loan
- You Need Funding for Long-Term Growth: SBA loans are ideal for long-term investments in growth, such as real estate, equipment, or business expansion.
- You Have Strong Financials and Good Credit: SBA loans typically require a strong credit score, extensive financial documentation, and a solid business plan.
- You Prefer Lower Monthly Payments: SBA loans have low interest rates and long repayment terms, resulting in lower monthly payments that are easier on cash flow.
Making the Right Choice for Your Small Business Loan Needs
Choosing the right small business loan option requires evaluating your business’s immediate and future needs, financial health, and tolerance for risk. Here’s a recap of when each option might be the best fit:
- Choose an MCA if: You need fast cash, have steady credit card sales, and can manage higher borrowing costs for short-term needs.
- Choose an SBA Loan if: You seek affordable financing, have good credit and financial stability, and need funds for long-term growth.
Both Merchant Cash Advances and SBA loans have their place in the small business world. MCAs are well-suited for businesses in need of fast cash and flexibility, even at a higher cost. SBA loans, by contrast, are ideal for business owners who qualify for low interest rates and can wait for a longer approval process to access substantial, long-term funding. We can help you prepare your business to meet sba loan qualifications.
With careful consideration, business owners can leverage these small business loan options to secure the financing that best aligns with their growth plans and operational needs. Whether you need an MCA for immediate cash flow or an SBA loan for strategic growth, understanding these financing options empowers you to choose the right path for your business’s future.