Difference between business loan and merchant cash advances - Business Loan Blog - Tata Capital

Difference between Business Loans and Merchant Cash Advances

Mar 10, 2017

One of the feasible ways to obtain funds during a cash crunch is through external sources. Businesses may obtain the necessary capital through numerous means, like angel investors, loans, a line of credit, overdraft, merchant cash advances, and venture capital, besides many others. However, loans and merchant cash advances are the two popular financing options in today’s business world.

Understanding business loans

A loan is generally provided by a bank or Non-Banking Financial Company (NBFC). Firms apply for a business loan to fulfill their credit requirements. It is necessary that the business fulfills the basic eligibility criteria to obtain the loan. Lenders consider factors like credit score of the business, financial statements, profit and loss account statement, credentials of the entrepreneur before sanctioning the loan. Upon successful submission of the necessary documents, the funds are disbursed into the primary account of the business. This borrowed amount has to be repaid over a period of time with a certain amount of interest.

Availing of a business loan online has become a convenient option due to quick and hassle-free disbursement of funds. Besides, banks and NBFCs offer competitive interest rates, extended loan tenure, flexible repayment options, and other benefits, thereby making loans a popular option among businesses.

About merchant cash advances

A merchant cash advance provides a lump sum amount as required by the business. However, the amount is not repaid in the same manner as a loan. In subsequent months after availing of a merchant cash advance, a portion of the revenue from every credit card sale is forwarded to the credit provider. This happens till the borrowed amount is paid off in full. Firms may, therefore, put their business plans into action by making use of their expected future credit and debit card sales. Instead of fixed daily payments, merchant cash advances offer flexible repayment options.

Deciding between the two financing options

Both business loans and merchant cash advances have their own set of pros and cons. Merchant cash advances do not require collateral to be kept against the loan. Also, it is not necessary to have a good history of business income in order to avail of a merchant cash advance. Besides, the approval rates are higher in such a mode of financing. Firms which fail to qualify for a loan have a chance to obtain a merchant cash advance.

However, merchant cash advances tend to be smaller in amount. Hence, firms with a larger capital requirement are unable to opt for such an option. Moreover, the fees charged for merchant cash advances are generally high. On the other hand, interest rates on commercial loans depend on numerous factors. If the business has a good credit history with a sound financial standing there are high chances of obtaining a lower business loan interest rate on the loan. Firms may, therefore, weigh the pros and cons of both the financing options and make a borrowing decision based on their business requirements.