What’s the Difference between MCA and Traditional Loans?

Before Deciding, Ask Yourself These Questions

Owning a business can be a very rewarding experience. As an owner, you get to make decisions to grow your business and foster future success. Unfortunately, not all decisions you make will be easy, especially when it comes to shortage of capital. No matter the reason, when this happens you must be able to access the capital you need in order to remain operational.

Business owners typically use one of two avenues to ease cash shortages:

turn credit cards into money

  1. Merchant Cash Advance (MCA) – provides up-front cash, in exchange for a percentage of future daily credit card sales.
  2. Traditional Bank Loan – provides up-front cash, in exchange for pledging business assets and agreeing to repay in monthly installments.
Fortunately, either option will do the job. However, it’s important to understand the difference between the two because they each have their own unique characteristics. The best option really depends on your business, industry, and financial history.

Merchant Cash Advance vs. Traditional Loan

MCA vs Bank Loan

Choosing the right financing approaches involves knowing your business goals, understanding your revenue and cash flow, and weighing your risk tolerance. Before choosing a lender, ask yourself these questions:

  • How quickly do you need funding?

Because of the simplified application process, a merchant cash advance will provide faster funding than a traditional loan which requires extensive paperwork. If you need funding quickly, a merchant cash advance suits your needs better than a lengthy traditional bank loan.

  • Is your business’s cash flow consistent?

The terms of a merchant cash advance are based on a portion of your business’s future sales. That means they are more flexible than a traditional bank loan which has strict laws limiting how much a lender can charge. If cash flow isn’t consistent, a merchant cash advance may be the best option because there is no fear of defaulting on payments.

  • How much documentation are you willing/able to provide?

Traditional bank loans generally require more documentation and collateral to apply than a merchant cash advance (which is typically a one page document). New businesses, with little to no collateral to offer, may prefer a merchant cash advance because of its simplicity.

  • What is my credit score?

In some cases, even a successful business may be denied for a traditional bank loan if its credit history is less than perfect. If you are concerned about your credit score, a merchant cash advance may be a better option, because they are less stringent on credit score requirements.

  • What type of repayment options are you looking for?

Traditional bank loans typically have a set monthly repayment schedule. Regardless of how well business is going, you are required to make the agreed upon payment each month. If your business tends to have fluctuating sales, a merchant cash advance may be a better option because you are only obligated to pay a percentage of actual sales made each day.

Learn More
Find out more information about a merchant cash advance by reading our Merchant Cash Advance Buyer’s Guide.

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