Merchant Cash Advances vs Term Loans

What Is a Merchant Cash Advance?

A lender provides a merchant cash advance (MCA), which differs from a traditional bank loan. A lender that provides a merchant cash advance will examine your credit card receipts to determine how much you need and how much you can repay. The contract you sign with the MCA lender will specify how much money you will get and how much interest you will have to pay back. Interest rates might vary greatly amongst businesses. The jurisdiction in which your business is located also has an impact on how much you eventually have to pay, since certain states have interest rate restrictions.


What Is an MCA Lender Buying?

In essence, the MCA lender is purchasing your future sales transactions. You have a contract with them, and MCA lenders will review your sales to determine whether you qualify for the loan, but the benefit of an MCA is that it provides you with a swift injection of cash.

If you have any water damage in your coffee shop that you want to repair but don’t have the means to do so, an MCA might be a useful approach to swiftly obtain financing for such unforeseen renovations.


What Is a Term Loan?

A term loan gives borrowers a big amount of money up front in return for certain borrowing conditions. Term loans are often intended for well-established small businesses with stable financial accounts. The borrower commits to a certain repayment plan with a fixed or variable interest rate in return for a predetermined quantity of cash. To lower payment amounts and the overall cost of the loan, term loans may demand significant down payments.


Person calculating loan repayment

Comparing How The Two Types Of Working Capital Work


How A Merchant Cash Advance Works

While obtaining an MCA is not as difficult as obtaining a loan, an MCA is not just a bag of money with no strings attached. When searching for a merchant cash advance to help your company, you must be aware of a contract with stipulations.

Advance Amount

This is the agreed-upon amount that the lender will grant you as a merchant cash advance under the MCA contract. It’s critical to appraise and request precisely what you need, or else you’ll have extra to repay. The advance might be less than, equal to, or well in excess of your monthly sales. It truly depends on how much you need and how long you’re willing to be responsible for paying back your daily sales to your lender.

Payback Amount

This will be a higher figure than the advance amount since an MCA lender adds a fee, known as a factor, to the money they lend you upfront. This sum may be much greater in certain situations than the interest rate on other types of loans.


You will have to deduct a daily amount from your credit card transactions while working to repay your merchant cash advance. Before obtaining a merchant cash advance, review your sales to see how feasible this will be throughout the repayment time.


How A Term Loan Works

Term loans are often offered to small businesses in need of funds to acquire equipment, a new facility for their manufacturing processes, or any other fixed assets to keep their operations running. Some firms borrow the funds they need to function on a monthly basis. Many banks have created term loan programs particularly to assist businesses in this manner.

Business owners apply for term loans in the same way they would apply for any other credit facility—by contacting their lender. They must submit statements and other financial proof of their creditworthiness.

Borrowers who are approved get a lump sum of money and are obliged to make payments over a certain length of time, generally on a monthly or quarterly basis.

Term loans have a predetermined maturity date and a fixed or variable interest rate. If the funds are utilized to acquire an item, the life span of that asset may have an influence on the repayment plan. To limit the risk of default or inability to make payments, the loan needs security and a thorough vetting procedure.  As previously stated, certain lenders may ask for down payments before advancing the loan.


Types of Term Loans

Term loans are available in a variety of lengths, which generally correspond to the loan’s duration. These are some examples:

Short-term loans: These are often granted to businesses that do not qualify for a line of credit. They usually last less than a year, although they may also refer to a loan that lasts up to 18 months.

Intermediate-term loans: These typically last one to three years and are repaid in monthly installments from a company’s cash flow.

Long-term loans: These loans range in duration from three to twenty-five years. They need monthly or quarterly payments from earnings or cash flow and utilize corporate assets as security. They restrict the company’s other financial obligations, such as other loans, dividends, or principals’ salaries, and might demand a portion of earnings put aside especially for loan repayment.


Key Differences Between A Merchant Cash Advance And A Term Loan

Funding speed is a significant advantage of advances

Advances are often available online, with funds put into the business’s account within 24 hours. In contrast, it might take weeks from the moment a bank loan application is submitted until the borrower is accepted and the funds are accessible.

Limits on borrowing

A merchant cash advance may provide sums ranging from a few thousand dollars to $250,000 or more. SBA-backed loans, on the other hand, may go up to $5 million.

Borrower requirements

A credit history is not required for an advance. A firm might be authorized for a loan based on its credit card transaction history. A bank business loan, on the other hand, would normally need the company owner having a personal credit score of roughly 700.

The owner is often required to personally guarantee the loan and may be required to submit extra security. A loan to purchase manufacturing equipment, for example, might be secured by the equipment or by a lien on the factory structure.


Who A Merchant Cash Advance Is Best For?

A merchant cash advance is ideal for a small company that need more funds to become more competitive and functional. Not all small businesses can receive bank credit to achieve what they want.

An MCA is not ideal for a company that has experienced a significant crisis that has fully shut down operations. A standard bank loan or a grant will be preferable to an MCA since they do not need you to maintain everyday transactions in order to repay them.

The MCA is a wonderful concept for a new small business that wishes to make non-interruptive upgrades.


When To Consider A Term Loan

If you’re looking for startup funding, you have a lot of possibilities. So, how can you determine whether a term loan is better for your company than, say, a revolving line of credit?

A term loan is a fantastic option for a short-term project or cost. A term loan, for example, might assist you pay the cost of purchasing merchandise or investing in a marketing campaign.

Term loans are best suited for well-established companies with a track record of financial success. If you have bad credit or no business experience, getting a term loan may be tough.

Finally, term loans are ideal for organizations that do not want funds right away. Applying for a term loan may be time-consuming, particularly if you want to take advantage of the low interest rates offered by a bank or credit union. So, if you need cash quickly, a term loan may not be the greatest solution.


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