So, you’ve got a small business and you need a financial boost to get it to where it needs to be next. The obvious option is a bank loan – but they often take months to be approved and finalised and perhaps your credit isn’t the healthiest.
Attracting ever-greater attention in recent time, merchant cash advances (MCAs) are seemingly becoming the future as an alternative form of business finance. Although often compared to traditional bank loans, an MCA is actually very different to a loan in not only the form that it takes, but also what is required when applying for one and the business circumstances that it’s best suited to.
Here’s the basics of how these two potential business funding avenues differ…
The way they’re repaid
When you’re thinking of taking out a loan to help with cash flow or to fund a specific project or new stock/equipment, you expect to have to pay the money back in fixed, regular instalments over a period of months or years. You may also need collateral or a personal guarantee to obtain it.
One of the main differences between a loan and an MCA is that an MCA is paid back as a percentage of your business’s debit or credit card sales over an open-ended period of time, and there’s no collateral or personal guarantee required. Of course, this means that businesses who don’t make a lot of income through credit or debit card sales won’t benefit from an MCA. It works best for businesses such as shops, salons, cafes and restaurants – predominantly the leisure sector.
With a bank loan, you might find yourself short of your repayments if your business goes through a quiet period. That can quickly become stressful as the pressure will be on to meet those fixed repayments. With an MCA though, you pay more money back at busier times and less during quieter periods. It provides the flexibility that traditional business loans just can’t offer. It’s super manageable and scalable.
It’s not unknown that applying for a loan can be quite difficult – especially for a small business. When applying, the lender will probably look at your personal and business credit information to try and determine whether your repayments are going to be manageable for you.
With an MCA, it’s not as long-winded or as stressful because the only numbers that really matter are your credit and debit card receipts, available through your business’s card processing firm. These companies have extensive data about your transactions at their fingertips, so you could receive a quote for an MCA within seconds of applying, and the money in 72 hours. Easy!
It’s also important to mention that if you want to take out a bank loan, you’ll probably be expected to have spent at least two years in business. You don’t have this hurdle with an MCA – although you will need enough data on your monthly card sales and turnover to provide. This makes it a good option for new businesses and start-ups.
The approval rates
To obtain a bank loan, you’re going to need a positive daily bank balance, acceptable credit and no excessive loans or bankruptcies. If this sounds like your business, then you’re in a wonderful place and a bank loan could be your best financing option.
If not though, it’s good to know that there are options such as MCAs out there that you will likely be approved for. MCAs have a high approval rate which is good news for any business with bad credit. Plus, it’s considered a sales transaction rather than a loan, so it won’t show up on your credit report. Make sure that you’re upfront and honest with your lender about your finances though. You’re still being lent the money on the basis that you will be paying it back, so there needs to be an element of trust and honesty.
So, which should I go for?
The answer will be different for every business. You need to consider the nature and growth stage of your company when looking for your most suitable option. If your business is sufficiently established and profitable enough to meet those regular and unchanging repayments, then opting for a traditional bank loan is probably your best option.
If you need funds fast and you make the majority of your money through your card terminal, then it’s a no-brainer. A merchant cash advance is a great option for these businesses who want to grow without taking a traditional financing route so it’s no wonder it’s popularity is massively on the rise amongst businesses everywhere.