Small businesses often need a cash infusion to take advantage of new opportunities or realize growth plans. When it comes to funding, there are many options. Merchant Cash Advances (MCAs),, and Small Business Loans are popular options. We’ll look at how a small-business loan differs from an MCA so you can make the right choice for your business.
What does MCA mean?
NerdWallet explained that an MCA is a contract whereby , a portion of future sales and fees are exchanged for a lump-sum payment.
MCAs are similar in many ways to loans, but most MCA providers call their product a financial offering and not a credit. The provider determines the total amount due by setting a factoring percentage. A factoring of 1.5 means, for example that a business who receives $20,000 will owe $30,000 in addition to any fees or costs.
Businesses have a regular repayment schedule. The MCA may set a schedule that is daily or weekly. Payback amounts are usually set as a percent of the total sales on credit and debit cards, but there are other options.
The requirements to qualify for these loans are generally lower than those of traditional small business loan.
What Is a Small Business loan?
In terms of structure and expectations, a small business loan is very similar to other types of loans. Small business owners apply for a small loan, and if they are approved, receive a lump sum payment. The loan must be repaid over time by the business. The interest rate is set by the lender and determines how much money you owe.
Borrowers must often meet strict requirements to qualify for loans from traditional lenders, such as credit scores and detailed documentation. Alternative lending providers have often more manageable rules for borrowing.
Differences between a Small Business loan and a MCA
1. How much do they cost small businesses?
Interest, fees and other MCA costs can add up quickly. The Balance explained that the annual percentage rate of an MCA could range from as low as 30% up to and at its highest of over 100% . An MCA’s total cost can be much higher than the price of a small-business loan for the same amount.
You can keep the costs of an MCA down by shopping around to find the best rates. Limiting the amount of money borrowed is another way to do this. And calculating the total cost before you commit to one. These strategies can also be used to find a small business loan that is cost-effective. These loans have lower APRs to begin with.
2. What They Are Used For
The way they are used is another difference between a small-business loan and an MCA. MCAs tend to be offered at smaller amounts than small business loans. Also, they have shorter repayment terms. Business News Daily reported that the repayment period for most MCAs is 6-24 months . They are used by businesses that need to raise money quickly. In just a few short days, the application can be approved and funds provided.
Alternative lenders that offer small business loans are able to provide many of MCAs’ benefits. QuickBridge offers borrowers the ability to request smaller amounts and has a quick turnaround time. Small business loans can offer many of the benefits of MCAs.
3. What They Get Paid Back
Several small business loans are repayable early. The remaining principal is reduced. Business owners who have the money to do so can reduce the amount of interest they owe.
MCAs demand frequent and consistent payments from the borrower. It’s not a good idea to pay them in advance. Businesses who take out a MCA must pay the full amount due, based on the factoring rate.
MCAs also usually include paying a certain percentage of the total sales to a provider. This amount can vary from one period to the next, such as a day, a week or a month, depending on how sales fluctuate. It can be difficult to estimate how long it will actually take to pay back the loan.
Most small business loans require a monthly payment. The amount of the principal and interest rate can affect the monthly payment. Calculating each monthly payment is relatively easy. When they borrow money for their small business, owners can be more confident in their repayment plan.
How to Find the Best Funding for Your Specific Needs
Understanding the difference between a MCA and a small-business loan will help you make the right decision for your situation.
MCAs have some benefits, such as a shorter payment schedule and lower borrowing requirements. The high costs and strict repayment terms can make MCAs less attractive over time. Alternative lenders can provide many of the benefits that a small business loan would, but without the higher costs.
QuickBridge can help you find a small business loan that is tailored to your needs. Contact us to learn more.
