What is a Merchant Cash Advance?
A Merchant Cash Advance, also referred to as an MCA, is a form of financing that provides a business owner fast access to capital. An MCA is not a loan, but rather an agreement from an alternative financial institution to buy a portion of your future sales.
In turn, you pay a portion of all debit and credit card sales, plus a fee to their MCA provider.
MCAs can be a solution for fast cash, but they can come with interest fees that are much higher than alternative financing options. Here we’ll cover four alternatives to Merchant Cash Advances to consider when looking for business financing options.
Merchant Case Advance Alternatives
Revolving Line of Credit
A revolving line of credit shares some features with a merchant cash advance, in that it provides fast access to large sums of cash to support, grow, and maintain a business. Lines of credit are business loans that can be as low as a couple of thousand dollars or as high as tens of millions, whereas Merchant Credit Advances typically offer up to a maximum of $250,000.
A line of credit is a non-dilutive financing option, meaning business owners maintain complete ownership, control, and profits accrued in their business. This type of financing is ideal for growing companies looking to scale, whether that’s into new retail locations, digital marketing campaigns, or research for new product lines.
Lines of credit are best used for large-ticket needs such as maintaining cash flow. Many of our credit customers use lines of credit to cushion cash flow between equity rounds, fulfill large Purchase Orders (POs), and enter new markets or large retailers. Depending on the financial institution supplying your line of credit, repayments can often be made on a scaling basis dependent on your revenue or sales for that month, making it a desirable option for growing businesses.
Best for: Lines of credit are best for established businesses looking to scale. Because the line of credit can grow with your business, it presents great flexibility to access increased funding opportunities as you grow.
Business Term Loans
A term loan is a fixed sum of money lended to your business, usually to cover similar expenses to a line of credit. There are two main differences between a term loan and a line of credit. The first being that payments on the loan are made in a monthly fixed amount, similar to how you’d pay off a mortgage or car loan. So, if sales are slow that month, you’re still on the hook for paying your entire loan bill.
The second difference is that once the loan is paid off, there is no opportunity to take out additional funds, or increase your loan amount before it’s completely paid off. Instead, upon completion, the borrower can apply to take out an additional loan. For some businesses, this may not be a problem, for those looking to scale quickly, a fixed loan amount may slow down your desired growth or place limits on which opportunities you can take on.
The approval process for term loans can be longer than those on a merchant cash advance. MCAs generally take less than one day to complete an application and up to 48 hours to receive funding. Term loans can be slower, with the approval process generally taking two to seven business days.
Best for: Business term loans are best suited for well established businesses with steady sales, and limited desire for growth. Due to the fixed nature of term loan repayments, you’ll want to be completely sure you’ll be able to pay the monthly fee in full.
SBA loans are loans provided by a private lender but guaranteed by the U.S. Small Business Administration. Because they are offered by the federal government, SBA loans are generally known for having lower fees compared to other business loans, because they are subject to regulatory caps on interest fees. While SBA loans were designed for founders who may not qualify for other funding types, they do tend to have fairly strict eligibility terms. SBA lenders generally require that you’ve been in business for at least two years, have “strong” annual revenue, and at least a 690 credit score.
There are a number of SBA loan options available, ranging from micro loans under $10k to SBA 7(A) loans up to $5 million. This presents a wide variety of options for businesses that qualify. Like term loans, SBA loans have a fixed repayment schedule with a recurring monthly fee. Arguably that biggest inhibitor of an SBA loan, is the amount of time the application and approval process takes. It can take a business owner up to 90 days to see approval of an SBA loan after beginning an application. As such, a merchant cash advance may be a more realistic option for businesses in need of faster cash options.
Best for: Due to their strict qualification standards, SBA loans are best suited for established businesses with consistent monthly revenue, just like term loans.
Equipment financing is a type of small business asset-based loan that must be used on purchasing machinery or other equipment necessary to operating your business. Equipment financing loans can be used for anything necessary to run your business such as office furniture, construction equipment, or commercial kitchen appliances. Of course, the biggest difference between equipment financing and a Merchant Cash Advance is the varied range of items, services, and opportunities that the cash can be used for.
According to NerdWallet, equipment financing interest rates range from 4% to 30% APR. Such a large range makes it extremely important to do due diligence on different lenders to make sure you’re getting the best rate possible. Additionally, be sure to understand the “soft costs” covered in your loan. These costs include fees on things like delivery and set up. Some providers will cover these costs in full while others may offer partial coverage or none at all.
Best for: Equipment financing is a great option for businesses purchasing a large amount of machinery or commercial products while opening or reviving their business.
Business Credit Card
Very similar to a personal credit card, a business credit card allows you to charge purchases on a cash advance, and then pay the balance at the end of your statement. Business credit cards allow small business owners to separate their personal and business expenses, and generally have lower maximum borrowing limits compared to lines of credit.
Business credit cards generally have lower maximums and higher interest rates than loans and Merchant Cash Advances. According to The Balance, business credit cards have an average interest rate of 17.56%. Like consumer credit cards, most business credit cards offer rewards programs with perks and cash-back bonuses. Additionally, most cards include an annual fee on top of any monthly interest that accrues.
Best for: Business credit cards are best used for day-to-day spending among all types of businesses. Because credit cards have lower maximums compared to business loans, they should not be used on large ticket purchases such as market research, development of a new brand or SKU, or fulfilling a national retailer Purchase Order (PO) for the first time.
While a Merchant Cash Advance may be a good option for some, there are many different financing options available for growing businesses. Reach out to CircleUp Credit Advisors today to learn how we can help fund your consumer business.