Merchant Cash Advance vs. Bank Loans: Pros and Cons

Picture this: Business is going well — and because you have a merchant account, the credit card receipts keep streaming in month after month. You’re growing, but you need financing to invest in your business and continue to grow.

Especially if your business is relatively young, getting merchant funding to achieve business goals can be difficult. Merchant cash advances and merchant loans can help keep your business growing. But what’s the difference between a merchant cash advance and a bank loan? And which is right for you?

There are pros and cons to merchant cash advances and bank loans. The best option really depends on your business, industry and financial history. Here are a few of the pros and cons of each:

1. Speed & Qualifications

When you request a merchant cash advance, you’ll typically be asked to provide bank statements and your merchant account history (i.e., past credit card receipts). Providers will use past performance to determine your ability to cover the cash advance. Many successful companies qualify and get the money quickly.

Bank lenders will ask for the above documents as well, but they also need to see credit ratings, collateral, tax records and much more documentation. The review process can take weeks or months. And even a successful business may be denied if its credit history is less than perfect.

2. Interest Rates and Repayment Terms

Technically speaking, merchant cash advances are not loans. You’re not borrowing money — you’re selling a portion of future sales. Because of this, there are many ways for merchant cash advances to be structured.

With bank loans, however, there are strict usury laws that limit how much lenders can charge. Bank loans are harder to secure, but they can be more affordable in the long term, depending on interest rates, loan term, repayment schedule and other factors.

Bank loans typically have set monthly payments. Regardless of how well business is going, you’re required to send $200, $500 or whatever the agreed-upon amount is each month. By contrast, merchant cash advances are usually tied to future revenue. Whether business is good or bad, you’re only obligated to share a certain percentage of sales.

3. Financing Availability

Following the financial crisis of 2008, many credit-worthy borrowers were unable to access traditional financing because banks weren’t lending. Merchant cash advances provided an alternative funding option for many businesses during this time.

Is a Merchant Cash Advance or a Business Loan Better for Your Business?

Choosing the right financing approach involves knowing your business goals, understanding your revenue and cash flow, and weighing your risk tolerance. If you need help weighing the advances and disadvantages of merchant cash advances and merchant lending, contact us today for a free consultation.

BluePay Processing, LLC is a registered ISO of Wells Fargo Bank, N.A., Walnut Creek, CA, U.S.A.
BluePay Canada ULC, is a Registered ISO/MSP of Peoples Trust Company, Vancouver, Canada.