The Difference Between a Merchant Cash Advance and Line of Credit
With more business funding options now than ever before, it can be difficult to decide which one works best for your growing business. Merchant Capital Access was one of the pioneer for the evolution of merchant cash advance. They couldn’t have imagine how much alternative lending industry has come around from small alternative lender to marketplaces like Shopify, PayPal, Square and many others who aren’t even in the lending business have gotten into the industry. When it’s lucrative you’ll see sharks come to capture as much market as possible.
In this article, we’re going to go back to the basics. We’ll discuss the differences between a merchant cash advance and a line of credit, two funding methods that can be misunderstood.
COMPARE MERCHANT CASH ADVANCE AND BUSINESS LINE OF CREDIT
Merchant cash advance | Business Line of Credit | |
Type of financing | Purchase of future sales | Loan of funds |
Approval process | Faster and less stringent, as low as 500 FICO, some lenders no CREDIT Minimum | Require strong credit, collateral, financial audit |
Repayment terms | Remitted based on daily or weekly retrievals or % of daily batch | Fixed weekly/monthly payments |
Interest rates | Flat fee typically higher than traditional loans, fixed payback, non-compounding for remaining balance. | Generally lower than cash advances but compounding for remaining balance if you pay only the minimum. |
Eligibility | Businesses with lower credit scores may qualify | Requires good credit history and financial standing |
Ideal for | Businesses with fluctuating revenue or seasonal sales, unbankable businesses, no other source of capital. | Businesses with predictable cash flow and stable revenue, have other source of funds |
Pros | Quick access to funds, simple application, no collateral required, renewable for additional funds | Predictable repayment schedule, lower interest rates, lower payments, no prepayment penalty |
Cons | Higher flat fee, potential for cash flow disruptions, no discount for early payoffs | Requires good credit history, application can be lengthy, collateral may be needed, hard to get approved. |
How Does Merchant Cash Advance Compare to Line of Credit?
Merchant cash advance was invented for business with credit card sales. Fifteen years ago, you couldn’t get a merchant cash advance if your business doesn’t accept credit cards. Now, even with sales from all sources of fintech payment forms, you can now access merchant cash advance through bank ACH which was invented to be able to provide funding to those who didn’t accept credit cards, like construction, like plumbers etc…
Combine the right technology with the right strategies to give the flexibility and sophistication it needs to succeed with amply of access to cash. Working capital has and still is a lifeblood. A huge percentage of businesses failed due to lack of working capital. Working capital is a business strategy not just looking at it a cash in and cash out.
What is the difference between a merchant cash advance and a line of credit?
A merchant cash advance (MCA) is not a loan. It’s the purchase of future receivables–businesses are given upfront, working capital that is then remitted through a percentage of the revenue generated by daily credit and debit card sales until the advance is fully remitted. Term is fixed removing compounding aspect relative to line of credit which accrues interest on the remaining balance daily or amortized fully.
This means that a merchant does not owe any funds until they generate sales. This flexibility provides great relief from the financial stress that may come with the other types of small business funding that we described earlier. Only revenue generating business can access merchant cash advance unlike line of credit.
A loan is money that financial institutions lend to a business that is paid back over a scheduled term over time, with interest. There are several types of loans, however, there are easy to qualify and hard to qualify loans but merchant cash advance is in the easy as you might imagine compare to line of credit even though they might be both unsecured loans.
Simply stated, an MCA does not qualify as a loan because it’s a sale of future revenue with either payment through ACH or merchant processing, it’s not subjected to the scrutiny or regulations that are imposed on standard bank loans. That means cash advances are a quick and easy way for merchants to access capital as stop gap or a future cashflow management. Similar to factoring, merchant cash advance doesn’t require an invoice to access funds, you just need steady monthly sales with very little NSF’s to avoid further bank degradation. Rather than waiting for a bank’s rigorous and slow approval process, knowing your approval chance is very slim, many have turned to quick cash with merchant cash advance.
Some line of credit will appear on personal credit, thus affecting owner’s ability to borrow on personal level. Compare that to merchant cash advance, which will not appear on business nor personal credits. In a nutshell, those are the many differences between a merchant cash advance and a line of credit other than the cost of funds.
For a quick overview of the various difference types of loans, refer to the table below.
