Merchant Cash Advance Vs. A Business Loan From The Bank [Which Is Better?]

merchant-cash-advance-vs-business-loan

Merchant Cash Advances (MCA) vs. A Normal Business Loan from a bank, which is better for you? That’s a question many business owners have when they begin reviewing (and researching) various funding options.

Typically, Merchant Cash Advances (MCAs) will cost you much more in interest charges than a traditional business loan from a bank. So it’s important to educate yourself on getting your funding from a traditional business loan instead.

Let’s review all the popular options below.

MCA Merchant Cash Advance Loans are:

  • Good as a last resort when you’ve been declined for all other types of loans and have no options. (But, only if your cash flow can handle the pressure.)
  • Loan amounts typically range from $2K – $2M with interest rate charges reaching up to 100% or more APR! Plus, a 1.0% – 1.5% Factor Rates on all Credit Card Transactions.
  • An MCA should be a last resort and only utilized when a traditional bank loan is not an option for you.

Popular business loan options that banks offer:

Business Line of Credit

  • Good for when you have a slow season, gap in income, or emergency. But, bad for a long-term game-plan because better long term business loan options exist which will have cheaper interest rate charges.
  • Loan amounts typically range from $1k to $250k with typical interest rate charges starting at a 14% APR.
  • Payment terms can vary at 6, 12, or 18 month terms, or longer.

Invoice Financing

  • Good for B2B business that need to pay invoices. Bad if your a B2C business.
  • Loan amounts typically range from $1k to 5 million with typical interest rate charges starting around 0.2% – 5%.
  • Payment terms can vary between 1 – 36 week terms.

Micro Loans

  • Good for if you need less than $50,000, but bad if you need more than that.
  • Loan amounts typically range from $1,000 to $50,000 with typical interest rate charges starting at a 8 – 15% APR.
  • Payment terms are under 1 year.

Equipment Financing

  • Good for equipment purchases or vehicles.
  • Loan amounts typically range from $2k – $2m with typical interest rates charges starting at a 6% – 40% APR.
  • Payment terms vary between 1 – 5 years.

SBA Loans

  • Good for long term game plans if you have good credit. But, they don’t typically work out well if you need emergency money or quick access to the funds.
  • Loans amounts typically range from $5k – $5 million dollars with typical interest rates offered at a 4% – 20% APR.
  • Payment terms vary between 6 months – 25 years.

Personal Loans

  • Best only if you have good credit and no other options for getting a traditional business loan.
  • Loan amounts typically range from $50k – $150k with typical interest rates starting at a 7% – 40% APR.
  • Payment terms vary between 1 – 5 years.

Business Credit Cards

  • Best if you need a fast loan for general purposes and would like to earn some credit card rewards too. If you need a high amount of capital or working out a long term plan, credit cards are not good for this.
  • Loan amounts typically range from $20k to $50k with typical interest rates ranging between 7 – 30%.
  • Payment terms are monthly or ongoing. I highly recommend paying off the balance every month.

Commercial Real Estate Loans

  • Perfect if you need financing on real estate properties that are commercial and you don’t need a residential property.
  • Loan amounts typically start at a minimum of $10k and have varying interest rate APR’s. For specific’s its best to speak with a broker on exact terms.
  • Payment terms are from 1- 30 years.

Summarizing The Best Bank Loan Options

Out of the list of loan options in the previous section there’s three that work the best for most businesses. The following should be on the top of your priority list for obtaining financing for your small business. (Notice how an MCA is not listed here.)

Short-term Loans – You don’t want to tie yourself down to something long-term unless you absolutely have to. A small loan can offer you a quick sum of cash for a small amount of collateral down as long as you have good credit and a history of paying off your debts.

Business Credit Cards – This will help your business build up its credit and prove that you can handle further financing. It’s a way to also reap the cash-back and other reward benefits of owning a credit card. When making large payments with a business card, these rewards may add up quicker than you might imagine. They may offer you flying miles, points, gas-rewards, and more. It will work better for you than a short-term loan if you want a long-term solution instead of a quick-fix. Always read up on the APR and interest amounts on each credit card. Read reviews from business owners that work in the same industry as you. See what credit cards they recommend and don’t sign up for a card that has interest rates beyond what you know you’ll be able to pay off. If you act irresponsibly, you will only dig yourself deeper.

Business Line of Credit – Another form of business credit, this is a flexible form of funding but will require you to have good credit and a good track record of payments. You won’t be able to get this loan if you’ve fallen behind, missed payments, or proven your business to be a liability to a loan company in the past. It may take years of solid payments to undo a bad record of payments or credit.

Final Thoughts

I hope you found the information in this MCA vs. Business Loan comparison helpful. Each option has it’s pro’s and con’s which will serve your business needs differently. Research your options well and don’t be afraid to ask lots of questions to whomever is helping you with the funding.

Have an experience relating to an MCA or Business Loan you’d like to share? Comment below.

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