There are various types of business loans that help businesses purchase equipment, expand operations, deal with seasonal issues, and more. The two most common types of business loans that are generally used for working capital are Merchant Cash Advance a Small Business Loan. Both provide fast access to capital, and approximately the same amount of potential debt funding. However, it is important to note the distinct differences between merchant cash advance funding and business loans. But what exactly is the difference between the two?
Many small businesses who don’t qualify for commercial bank loans seek out merchant cash advance payments due to the perceived flexibility. You pay less during low seasons, and pay off your loan when you have more business – however this results in a much higher APR as the debt begins to accumulate, which negatively impacts your business’s operational capacity.
Many businesses see a rate shown with merchant cash advances that end up being much higher as they struggle to pay back the debt. The key is factoring, which is how merchant cash advance companies process their payment calculation. While the stated factor rate can seem attractive, you can end up paying more than 50% APR using merchant cash advances. In addition, since they are not technically a loan, you are not legally protected and may become a victim of predatory lending tactics.
For short-term, routine purchases – using a line of credit should be sufficient, but for bigger capital purchases such as equipment, expansion, renovations – a term loan would be ideal. Merchant Cash Advances have flexible attributes that make them attractive to small business owners, but if you run the numbers it proves to be less valuable. You can calculate APR of a term loan here and calculate a merchant cash advance APR here. In virtually all cases, a Merchant Cash Advance will be more expensive.
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