Merchant Cash Advance vs. Business Line of Credit

Merchant Cash Advance vs. Business Line of Credit

 

Business owners often need working capital to develop and grow their businesses. Two of the most common options these business owners turn to is a merchant cash advance and a business line of credit. It's important to understand the difference between these two options.

  • Merchant Cash Advance:This option is a business loan alternative that provides business owners with a lump sum of money upfront in exchange for a set percentage of future sales.
  • Business Line of Credit: This type provides business owners with a set line of credit that they can draw on as often as they need to, if they continue to make regular payments and don't go over their set limit.

 

Qualifications

As a business loan alternative, a cash advance for merchants is typically faster and easier to obtain than a line of credit. Business owners will have to provide basic company information and provide normal business records. Rather than focusing on how many years the company has been in business, cash advance providers are more concerned about business' monthly sales deposits. These funders will use the sales records and other data to determine the amount of the cash advance.

A business line of credit is a form of a business loan. Therefore, business owners must go through the same application process as a standard loan. This can be a long and cumbersome process, as financial institutions will perform credit checks and request various documentation. Typically, banks, credit unions, and other financial institutions require businesses to have a good credit rating, be in business for at least one year, and have a proven sales record in order to qualify for a business line of credit.

Payment Process

With a business cash advance, business owners make daily payments. These payments are based on a set percentage of sales made during that set period.

With a business line of credit, business owners make monthly payments based on the amount they used, bank fees, and their specific interest rate. If the current balance on the line of credit is zero, then no payment is due.

Who Uses These Lending Options?

Businesses from all industries use various lending options to obtain working capital, but not all loans are right for every business. For example, a local lawn care service company that has few credit card sales may not qualify for a business cash advance. However, a business line of credit may be ideal for their situation.

On the other hand, a newer online retailer that only accepts credit card sales may easily qualify for a cash advance for merchants yet find that many banks will reject them for a business line of credit.

 

Some companies even benefit from having both a business line of credit and a cash advance. For example, they may use a business line of credit to help cover payroll during the slower months yet use a cash advance to renovate the warehouse.

It's important to understand the difference between a merchant cash advance and a business line of credit, so you know which type is right for which business. If you're ready to join a great sales team that helps small businesses find the lending solutions that's right for them, contact Vader Mountain Capital today.

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