You will get multiple options to get finances for your business, which also includes traditional loans and merchant cash advance. Both of these come with their own set of advantages and disadvantages, which makes it crucial for the business owners to thoroughly understand their differences.
In this comprehensive guide, we’ll delve into both traditional loans and merchant cash advances, exploring their processes, eligibility criteria, repayment terms, and more. By the end, you’ll be better equipped to determine which financing option is the right fit for your business.
This information will help you to decide between both loan types and let you select the one that would be suitable for you.
Understanding traditional loans
Whenever it’s time to get a loan or the very thought of it takes us to banks. They usually offer loans that are not of a high amount, but the challenge here is to qualify for them. Almost 72% of small business owners apply for these loans and get rejected. This happens because banks look for a solid personal or business credit score, personal guarantee, collateral, and a good financial background. Moreover, it takes your time as the whole process would take almost three months.
Working of traditional loan
Traditional loans have been a go-to choice for small business loans and financial institutions for decades. This process involves the following:
- Application: Business owners are required to submit a proper application, which involves adding business plans, financial statements, and other documentation.
- Underwriting: Lenders then judge the creditworthiness, financial health, and financial statements of the borrower.
- Approval: If your loan is approved, the lender will offer you a lump sum loan amount along with a fixed interest rate and repayment terms.
Understanding merchant cash advances
A merchant cash advance is a substitute financing option where a business receives a lump sum amount in exchange for daily percentage use of credit card sales along with a fee.
MCA has different characteristic based on the lender:
- No fixed payments: There are no fixed payments, such as monthly or weekly; instead, there are deductions from your credit card on a weekly or daily basis.
- Quick Approval: The application process of merchant cash advances is quite a lot faster than traditional banks.
Working of merchant cash advance work
Below stated is the process on which merchant cash advance works:
- Application: Business owners would have to submit their credit card sales and overall financial health information.
- Offer: The merchant cash advance provider then offers a lump sum amount that includes the factor rate, determining the total amount for repayment.
- Repayment: The percentage of your daily sales of credit is also called a holdback, which is collected till the time you have fully paid your advance.
Comparison of merchant cash advances and traditional loans
This section will help you to understand the difference between merchant cash advance and traditional loans.
Eligibility requirements
MCAs: MCAs don’t have strict eligibility criteria, as they focus more on daily credit card sales and business cash flow than on credit scores.
Traditional Loans: These loans have strict criteria for getting qualified, and you must look at your credit history, collaterals, etc.
The impact of credit scores on both
MCAs: Even though credit scores are considered, they don’t have much weight when it comes to approval of MCA.
Traditional Loans: Banks give credit scores a lot of importance when they have to approve your loan application.
Repayment terms
MCAs: Repayment of merchant cash advance is based on an everyday basis and also fluctuates with the performance of your business.
Traditional Loans: There is a fixed amount that you need to pay every month, and it is decided at the start of your loan.
When to choose merchant cash advances over traditional loans
When you select your financial option, it should align with your business objectives. While MCAs provide you with speed and flexibility, traditional loans have stability and come with a low interest rate. Ultimately, your decision should be based on your requirements.
When you look around the finance world to select your best option, you need to carefully consider every option. Both merchant cash advance and traditional loans provide you with viable ways of getting capital.
Conclusion
Both traditional loans and merchant cash advance serve different purposes depending on your business needs. Traditional loans are suitable for businesses seeking stability, lower costs, and predictable repayment terms, but they require strong credit and a lengthy approval process.
Conversely, merchant cash advance provides fast, flexible funding, making them ideal for businesses with fluctuating sales or urgent financial needs.
Choosing the right option depends on your business’s economic health, goals, and ability to meet repayment terms. You can select the financing solution that best supports your business’s growth and operational needs by carefully evaluating both options.
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