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How are Merchant Cash Advances different from a Bank Loan?

Published on 4th July 2017 - Last update on 1st July 2020

With the sheer amount of business finance solutions on offer from the Alternative Finance industry, you can be forgiven for getting a bit confused by your options. With so much to choose from, you need to be sure that what you’re applying for really is appropriate for your business, granting you the value you expect. But of the many misconceptions concerning this industry, none is more prevalent than the confusion between Merchant Cash Advance and business loans. So, to put an end to this confusion and point you in the right direct, here’s why Merchant Cash Advance is not Business Loan.

What is a Business Loan?

Whether it’s offered by your local high street bank or through an Alternative Finance Lender, a business loan is a great way of acquiring a lump sum and utilizing it however way you see fit. When discussing loans we often tend to describe them as being either secured or unsecured, with terms that are short or long-term. In short, a business loan is a rigid but predictable financial construct, whereas a Merchant Cash Advance takes on a much more flexible approach, which we’ll discuss later.

A Secured business loan could allow your business to acquire anything from £5,000 to as much as £1,000,000 on the condition that you offer either business or personal assets as security. Meanwhile, an Unsecured loan could grant you access to a lump sum ranging from £5,000 to £250,000, without the need to provide assets as security.

Yet, whether Secured or Unsecured, you will be required to adhere to a fixed monthly repayment scheme. A short-term loan can range from 1 – 3 years whilst a long-term agreement can extended from 3 – 6 years and beyond. The greatest benefit of this is knowing how much you’ll pay at the end of each month and for how long, allowing you to better manage your business’ finances.

When applying for a business loan you will be required to present lenders with your credit score plus your business history and those of any associated directors. Naturally, it’s better to have a high credit score accompanied by a positive business history but business can be a fickle beast where not everything works out as intended. If your credit score is far from pristine and you’ve got failed businesses associated to you and your directors, acquiring a business loan can prove difficult or expensive. As such, should a business loan lose its appeal for you, perhaps a Merchant Cash Advance could offer what you’re seeking instead?

What is a Merchant Cash Advance?

Growing increasingly popular, Merchant Cash Advance (MCA) is a much-loved finance solution among many UK sectors, including retail, catering and professional services to name just a few. One of the reasons for this is because of the flexible approach that the product takes, allowing you to feel less restricted and confined during the course of the agreement.

Merchant Cash Advance also boasts one of the highest acceptance rates, with decisions and funds paid directly into your account, often, within 48 hours. A far cry from the traditional loan where it can take weeks or even months to receive a decision. Plus, it uses only your sales reports and pays little attention to your credit score and previous business history. Consequently, Merchant Cash Advance solutions are often referred to as a source of quick cash.

In order to qualify for a Merchant Cash Advance, your business must be able to support credit and debit card transactions, whether in store or online. You’ll also be required to provide lenders with sales reports for 3 or more consecutive months, depending on the lender. These reports are vital as they form the basis for providing you with a lump sum and grant the lender an insight into the behaviour of your card paying customers.

Unlike business loans, the lump sum you could acquire is based solely on your sales reports. So to elaborate, if your business earns around £5,000 in card sales each month the potential lump sum would be roughly in the same region. Lump sums are calculated by taking your sales reports and creating an average. In a way, the lender could be described as purchasing your potential monthly sales for a particular month at a discount. This is because the lump sum obtained via an average could potentially be less than what’s actually generated in revenue during the month concerned, plus interest and any fees incurred.

Another key difference between Merchant Cash Advance and a Business Loan is the way in which it is repaid. Whilst loans require you to commit to fixed monthly repayments for a set period of time, Merchant Cash Advance solutions adopt a more fluid quality that’s kinder to your business’ finances, by taking a percentage of your projected monthly sales. To elaborate on this further, were, for example, a lender to offer a rate of 18% that would mean 18p from every £1 your card paying customers spend. As such, it could be said that your customers are paying off the product on your behalf.

Since the lender is taking a percentage, should your card sales waiver on a particular month, the amount that you’ll need to pay falls. However, should you, instead, see a rise in card sales then the amount you would pay increases too. By utilising this see-saw like repayment scheme you’ll only ever pay what you can afford without needing to dip into your capital. Although this can make effective budgeting a challenge, it’s worth noting that most businesses tend to repay a Merchant Cash Advance solution within 6 – 12 months, so the sooner the product is repaid the sooner your business’ revenue streams can be restored back to normality.

Which is the right solution for your business – Merchant Cash Advance or Business Loan?

It all depends on your business’ situation and the condition of your finances. If you value reliability, being able to budget and possess a reputable credit history then perhaps a business loan could prove beneficial. However, if you need money fast, have strong monthly card sales and prefer a much more fluid approach to finance, a Merchant Cash Advance solution can definitely help.

As always, knowing which finance solution to choose for your business can be a tricky endeavour. There’s so much to consider and a vast array of lenders hoping to garner your attention, all claiming to offer value for money. However, how can you be truly sure that what you are applying for is the most appropriate and affordable solution for your business and with great rates to match?

That’s why more and more business owners are choosing to source business finance with Rangewell. With our services and expertise, we can help source the most appropriate finance solution for your business including Merchant Cash Advance and a diverse array of business loans, all bundled with highly competitive rates to match. So no matter what your goals are, Rangewell is extending a helping hand and leading the way to a brighter tomorrow.

Our values are simple – We’re on your side

At Rangewell, our services are clear and transparent. We support a wide range of SME businesses of every shape and size, for finding every type of finance. Follow us on Twitter and LinkedIn for business tips and tricks, and feel free to call us on 0203 637 2340 if you’d like to chat about what we can do for you.

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David Harrison

David Harrison

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