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What’s The Difference Between a Merchant Cash Advance and a Business Loan?

Today, many small businesses that do not qualify for traditional business loans are turning to alternative sources of funding, such as merchant cash advances. There are significant differences between these funding products, however, and understanding them is crucial to choosing the right option for your business. 

If your business is already struggling under the terms of a merchant cash advance agreement, it is wise to consult with an experienced debt relief specialist. Meanwhile, let’s take a look at the differences between merchant cash advances and business loans.

Merchant Cash Advances at a Glance

A merchant cash advance (MCA) is an alternative funding option to traditional bank loans that provides underserved small businesses, such as restaurants and retailers, with quick access to working capital. As the name implies, an MCA is an advance, not a loan. 

More specifically it is a purchase and sale agreement in which funds are advanced to the merchant in exchange for a percentage of its future receivables. As the business generates credit card sales, it pays a fixed percentage to the funder until the advance has been repaid.  

MCAs v. Business Loans

There are several differences between an MCA and a loan, not the least of which are repayment amounts and repayment terms. Traditional business loans have a fixed repayment schedule over a specified term, without any fluctuation. By contrast, payment amounts in a merchant cash advance are based on revenue. 

This means the repayment schedule in an MCA may be variable due to fluctuations in revenue. The MCA agreement will establish your payment amount, which is a percentage of your credit card sales. Because the payment amount is based on the funder’s estimate of the business’s projected monthly revenue, the payment can fluctuate to an increase or decline in receivables. 

What is the interest on a merchant cash advance?

Unlike a bank loan that comes with an interest rate as well as an annual percentage rate that reflects the actual cost of funding, pricing on a merchant cash advance is based on a factor rate, which is the ratio of receivables purchased to the amount advanced. 

As an example, a funder advancing $10,000 in exchange for $12,000 of future receivables is actually charging you a 1.2-factor rate. A higher factor rate increases the cost of funding, and the MCA provider will base the factor rate on the financial status of your business. 

What happens if revenue declines?

If your business experiences a receivables shortfall, the MCA agreement should provide for a mechanism to restructure the repayment terms known as a reconciliation clause. This is where an experienced debt relief specialist can help. 

Ar ReconcileMyMCA.com, our debt relief specialists have extensive experience helping small business owners reconcile their merchant cash advances. We are keenly aware that MCA providers often include onerous provisions in cash advance agreements that can place your business’s assets at risk of being seized in the event of default. 

For this reason, you must immediately notify your funder of any shortfall and ask to restructure the transaction. If the funder refuses to reconcile your cash advance, we will explore all your legal options, including filing a lawsuit. 

The Takeaway

Merchant cash advances provide an alternative funding option to small businesses that do not qualify for traditional business loans, however, the inherent risks of an MCA require careful consideration. At the end of the day, it takes a highly skilled debt relief specialist to advise you about all of your funding options.