Although there are business owners who don’t need outside assistance to either start or grow their organizations, many find their success depends on additional financing from outside sources. Doing so gives them access to capital that can help fund payroll, inventory, management systems and equipment, making day-to-day operations run smoother and more effectively.
Business cash advances and business loans are two financing options to consider. While some people may believe these terms refer to the same method of funding, they are actually quite different from one another, with their own benefits and drawbacks.
Here’s a brief overview of both options:
Business Cash Advance
A business cash advance, also known as a merchant cash advance, is a single payment of capital to the borrower, who will then pay back that money by using a percentage of his or her business’ credit card sales. Think of it more like a purchase than a loan, as the cash advance provider is essentially purchasing future credit card sales at a discount (e.g, a provider might pay $10,000 for $13,500 of credit card processing receivables).
Because a company’s card transactions vary on a daily basis, there isn’t a set maturity date for the borrower. If your business’ credit card sales are typically high, it may only take you a few months to pay back your business cash advance, depending on how much money you were provided and how much that is relative to the total credit card volume your business processes in a given month. However, if you happen to get funds during a slow time of year, it may take you a bit longer than you initially anticipate.
In order to qualify for a business cash advance, you must supply certain information about yourself and your business, including company name, business ID, and recent business tax returns and credit card processing statements. Although you also have to provide a credit report, your credit score doesn’t play a huge role in the approval process. You could have a below-average credit score and still obtain this form of financing. Usually, you are notified within a few days if you have been approved, as well. This enables you to receive the funds in a short amount of time and start spending or investing however you see fit for your business.
A business loan is a lump sum of capital provided by a lender or bank. The borrower works toward paying back the loan (with interest) through monthly payments. These payments typically don’t change, regardless of how much or how little money your business is making. If you get behind on your payments, you will likely default on the loan. However, lenders are often willing to work with you if you communicate your struggles early on. But this also depends on whom you borrowed from.
Additionally, there is a fixed reimbursement date by which the borrower must repay the loan. Again, if you’re having trouble keeping up with the payments, it’s best to contact your lender and discuss it with them as soon as possible.
The application process for a business loan is similar to that of a cash advance, with the merchant sharing specific information regarding his or her business. However, your personal and business credit scores are major factors in whether or not approval is granted. This gives lenders insight into how well you are managing expenses. A subpar credit report is likely to indicate the person’s inability to pay back the loan on time and in full. Further, applicants are typically contacted within a short amount of time and told whether they have been approved or not, but funding the loan may take 30 days or more to complete.