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• By Jill Wyatt
• Apr 19, 2022
• 5 mins read

3 Differences Between Small Business Loans and Merchant Cash Advance

Many small businesses need an infusion of cash to make the most of new opportunities and realize plans for growth. There are plenty of options when it comes to securing those funds. Merchant cash advances (MCAs) and small business loans are two popular choices. Let’s look at the differences between a small business loan and an MCA to help you make the best choice possible for your company.

What is an MCA?

An MCA provides a lump sum in return for a part of future sales as well as fees and interest, NerdWallet explained.

While the result of an MCA is in some ways similar to a loan, many MCA providers define their offering as a financial product but not a loan. The provider sets a factoring rate that defines the total amount owed. A factoring rate of 1.5, for example, means a business receiving $20,000 would owe $30,000 plus any other fees or costs.

Businesses follow a frequent repayment schedule. The schedule is often daily or weekly, depending on the MCA. The payback amount is generally set as a percentage of total credit and debit card sales, but other options exist.

These loans tend to have lower requirements for borrowers to qualify than traditional small business loans.

What is a Small Business Loan?

A small business loan is similar to many other types of loans in terms of its structure and expectations. A small business owner applies for a loan and, if approved, receives a lump-sum payment. The business must then pay back the loan over time. The lender sets an interest rate that determines the total amount owed.

Loans from traditional providers often involve strict qualification requirements, like credit score and detailed documentation, that borrowers must meet. However, alternative lending providers often have more manageable borrowing rules.

3 Differences Between a Small Business Loan and an MCA

1. What They Cost Small Businesses

The interest, fees, and other costs of MCAs can quickly add up. The annual percentage rate (APR) of an MCA can range from a low of 30% to a high of more than 100%, The Balance explained. The total price tag of an MCA can be significantly higher than a small business loan of the same amount.

There are ways to keep the cost of an MCA low: shopping around for the best rates, limiting the total amount borrowed, and figuring out the total cost of the MCA before committing to one. However, these strategies are also useful for finding a cost-effective small business loan. And those loans tend to have a lower APR to begin with.

2. How They’re Used

Another difference between a small business loan and an MCA is how they’re used. MCAs are generally offered in smaller amounts than traditional small business loans. They also have shorter repayment periods. Business News Daily explained that most MCAs are designed to be paid back in 6-24 months. They tend to be used when businesses need funding quickly. The application can be processed and funding provided in just a few days.

It’s important to note that alternative lenders offering small business loans can provide many of the benefits associated with MCAs. QuickBridge, for example, also features quick lending timelines and allows borrowers to request lower amounts than would be possible through a traditional provider. While each company’s situation is different, it’s possible to gain many of the same benefits of an MCA through a small business loan.

3. How They’re Paid Back

Many small business loans can be paid back early. This reduces the remaining principal. If business owners have the funds available to do so, they can lower the total amount of interest owed.

MCAs require frequent, consistent payment from the borrower. There isn’t a benefit to paying them off ahead of time. Businesses that take out an MCA have to pay back the total amount owed, as determined by the factoring rate.

Additionally, MCAs usually involve paying a set percentage of total sales to the provider. That amount can change from one time period – day, week, or month – to another as sales rise and fall. This can make it difficult to predict exactly how long it will take to finish paying back the loan.

Small business loans usually require a set payment each month. This can change somewhat based on the remaining principal owed and the interest rate. However, it’s relatively simple to calculate each month’s payment ahead of time. Company owners can have more confidence in their plan for repaying the amount owed when they take out a small business loan.

Finding the Best Funding for your Specific Needs

Understanding the differences between a small business loan and an MCA helps you make the best decision possible for your needs.

MCAs provide some advantages, like quick payment timelines and lowered requirements for borrowing. But the high costs and repayment rules can make them less attractive in the long run. A small business loan from an alternative lender can offer many of the same benefits without those higher costs.

QuickBridge is here to help you secure an effective, manageable small business loan that aligns with your company’s needs. To learn more, get in touch with us today.