Small Business Loans vs Cash Advances – What’s the Difference?
In the course of doing business, borrowing cash is often an inevitability to keep your business afloat or expand. Usually, small businesses can choose between a bank loan and merchant cash advance. Depending on your needs and the urgency of the loan, these options have their own advantages and disadvantages. Here are a few things you must keep in mind when selecting which borrowing option to choose from.
If you really have an urgent need for a loan, a merchant cash advance may be your best choice. Requests for a merchant cash advance can be approved within 12 or 24 hours, which is pretty fast when compared to bank loans which may take weeks or even months.
Merchant cash advances only require your merchant credit card statement to make a lending decision. In the case of a bank loan, there is a lot of paperwork required other than just your merchant account statements.
Banks may require you to process detailed and legal documents. The bank has to prove your creditworthiness as well as establish alternatives for repayment in the form of collateral as security in case the borrower defaults. In addition, there is a higher risk of being denied funding from banks, leading to further delays.
Therefore, if you need the cash for immediate use, merchant cash advances are the best option for you. There are many available options for cash advances for UK registered companies, so you should be able to get a merchant cash advance sorted out today.
The borrowing limit for merchant cash advances is lower when compared to a bank loan. If you really need huge financing to acquire a new factory, for instance, you will probably have no other option but to get a bank loan.
Merchant cash advances repayment is structured as a percentage of your future sales. This means that repayment is made based on the percentage of your sales; higher sales translate to higher repayments.
This removes the monthly fixed repayments required by bank loans and can be great during downturns for seasonal business. However, you are likely to repay at a higher interest rate without realizing it. This can be even as high as 150%.
On the other hand, bank loans have fixed amounts you need to repay on a monthly basis whether business was great or not. However, since bank loans fall under a high regulated bracket, interest rates are predetermined and controlled.
This makes bank loans more affordable and the amount you owe every month keeps reducing in most cases. Therefore, if you have a great credit score – above 700 averagely – and are not in a do-or-die situation, this is the best option for you.
In many cases, getting a bank loan might be better due to their affordability, but their longer wait time and restrictions may make a merchant cash advance more advantageous depending on your situation. The most important thing is to know your business in and out, that means keeping tabs on your cash flow, profits and debts, and understanding how much you can afford to repay and which financing options are realistically attainable for you.