Growing businesses sometimes need financial help to attract and maintain a customer base, increase revenues, manage cashflow and invest in new inventory.
Seasonal fluctuations, unique circumstances and unforeseen costs can all affect how enterprise owners operate and further their business ambitions. A merchant cash advance (MCA) is a finance option that can assist companies with the above issues, but is not the same as a standard business loan.
While MCAs and business loans both provide firms with funding, they have substantial differences. These include repayment terms, the approval process and interest and fees, among others. The main way that these finance products differ, however, is that MCAs are paid back via a percentage of cards sales, while business loans require fixed monthly payments plus interest.
Here we explore the two finance products in detail and what makes them different to help firms in need of funding to decide which best suits their needs and aims.
Merchant cash advance (MCA)
An alternative financing solution to traditional business loans, MCAs are considered a short-term funding option. They are suitable for enterprises that accept credit and debit card payments. In simple terms, they involve lenders supplying firms with a sum of money upfront and the business making repayments using a set percentage of its sales via card transactions, plus fees.
Approval
Getting approved for MCA often involves a less stringent process than applying for a standard loan. This is because lenders focus on a company’s card sales history instead of traditional credit checks.
Security
Lenders provide funding based on the strength of a company’s card sales with an advance. As a result, collateral isn’t required to access MCAs.
Funding speed
As extensive credit checks and collateral aren’t required for approval, it is usually speedier to access funding via MCAs in comparison to traditional business loans.
Repayment
Repayments sums are deducted monthly, weekly or daily through a percentage of the company’s card sale transactions, plus interest, up until the total funding is fully repaid. The amount taken is determined by credit and debit card sales. However, a deduction of around 10% of each sale is common. MCA repayment time scales can vary depending on the agreement. Unlike business loans, no conventional terms for repayment exist as they are based on business sales. Consequently, higher number of card purchases, the faster the MCA is repaid.
Interest and fees
While standard business loans have a fixed rate of interest, MCAs have factor rates. This can make them a more expensive option.
Regulation
In the UK, MCAs are not classed as a loan, but a sale of future revenue. As a result, they are exempt from regulations.
Business loans
A finance product that provides a firm with funds to support various needs, business loans are designed specifically for commercial organisations, not private individuals, and involve repaying a borrowed sum, plus interest, within a set period via regular payments.
Approval
The approval process for applying for a business loan can be complex. It often requires a strong credit score, employment checks, collateral, and generally a more in-depth application process than that required to secure a merchant cash advance. Getting approved can be more challenging for firms with fluctuating sales or a shorter credit history.
Security
Business loans can be secured or unsecured. Enterprises can access secured loans that involve larger amounts and pledge assets as collateral, like property and expensive equipment. Unsecured loans don’t involve assets as security, instead the creditworthiness and guarantee of the company director is used to assess eligibility.
Funding Speed
Due to the lengthier approval process, credit checks and valuation of assets, it usually takes longer to access a business loan than an advance.
Repayment
Business loans are repaid with fixed payments each month over a set period.
Interest/Fees
Enterprises pay an agreed amount of interest over the term of the loan and usually pay fees for late repayments.
Regulation
Business loan providers are typically regulated by the UK’s Financial Conduct Authority (FCA).
Are looking for a merchant cash advance or business loan?
Whether you seek a loan or a merchant cash advance, you can rely on AJL Finance for support. Complete our eligibility checker today or get in touch for further details on the products we offer.
