When business owners are in need of extra working capital, the traditional route has been to apply for a bank loan. However, over the past few years, more entrepreneurs have been using merchant cash advances – or MCAs – in order to get the working capital they need without the stipulations of conventional lending methods. But how do the two compare?
A conventional bank loan wherein qualifying business owners take on debt in exchange for funding. This can impact the company's credit rating and prohibit securing other forms of financing. MCAs, on the other hand, are considered a sale on receivables, and do not count as debt on the balance sheets. The credit rating is preserved, and businesses are free to seek out extra sources of financing, even bank loans.
A merchant cash advance is repaid through a percentage from every credit card transaction. This means whether sales are light or robust, the rate of payment is flexible and adjusts to the generated revenue. Bank loans have a payment schedule that business owners must adhere to or risk defaulting on the loan. Whether your business generates a lot of revenue, or if sales are sparse, those monthly payments must be met.
As anyone who has ever taken out a bank loan will tell you, paying off the loan ahead of schedule to eliminate existing debt will trigger heavy penalty fees. Bank loans are structured around those payment schedules (see the previous section) to make the most money off of interest. By contrast, MCAs do not adhere to such a schedule, so if there is a period of heavy sales, and the advance is repaid before the terms come to a close, then the agreement is settled. No penalties. No fees.
An MCA has no specific use. That is to say, a business owner can use the funds to stock inventory, hire additional staff, cover rent and payroll, complete internal projects, run advertising campaigns, or anything else the business needs. Every bank loan, on the other hand, has an intended purpose. Taking out a bank loan for inventory must be used for inventory, and any deviation can be considered a violation of the terms. The working capital from a cash advance can be put into any one aspect of a business, or divided up among various operations or projects.
So Are Bank Loans Better Than MCAs?
Bank loans work very well for those business owners who meet the requirements of excellent credit and a long history of strong financials. MCAs offer more flexibility, which makes them appeal to businesses of all sizes, regardless of credit, across all industries.