If you have an excellent product or in-demand service, you want to reach as many customers as possible. Still, you can only grow your business if you have sufficient cash. When looking for financing for your company, you have probably thought about both a merchant cash advance and a conventional business loan. There are some significant differences between these two types of financing you should know about, however.
Conventional Business Loans
When seeking to secure financing for business operations, entrepreneurs often initially think about a conventional business loan. That makes sense, as traditional loans often have low interest rates and enviable terms. The application process, however, can be incredibly burdensome. That is, to receive a business loan from a bank, you likely must provide income statements, tax returns and other financial documentation. The bank may also consider your personal credit score when making its lending decision.
After you receive approval for a business loan, the bank usually provides funds in a single payment. You can access this financing as you need, but you must make monthly repayments. You may also have to plan for a balloon payment at the end of the loan. Still, banks are often in a position to offer borrowers lower interest rates on conventional loans. With other types of financing, you may pay higher rates.
Merchant Cash Advances
With a merchant cash advance, you probably don’t have to jump through the hoops that a traditional bank loan requires. That’s because this type of funding works differently than an ordinary business loan. To qualify for a cash advance, you must prove that your company accepts credit cards. If you do enough credit card sales to meet the lender’s minimums, you probably qualify to receive a cash advance. Generally, you do not have to provide extensive documentation to apply for a merchant advance.
If your company qualifies for a merchant advance, you receive funds in a single payment. Every time you accept a credit card for a purchase, the lender takes a percentage of the sale until you have repaid the loan amount. Interest rates for merchant cash advances are often moderate, but they are usually lower than credit card interest rates.
Which type of financing is right for your company largely depends on your business objectives and creditworthiness. To be certain you make the right choice, you should understand the difference between a merchant cash advance, a traditional business loan and other financing options.