Loan Vs. Cash Advance: Which Is Right For Your Small Business?

//Loan Vs. Cash Advance: Which Is Right For Your Small Business?
loan vs. cash advance

In the world of small business financing, there are loans and cash advances. They are not the same thing, though some people get them confused. Below are a few key differences between a loan and a cash advance, with some tips to know which is right for you.

Small Business Loans

Small business loans can help a business grow and expand, but they are quite different from cash advances. Here are some of the key characteristics of a loan:

  • A loan is money provided by a financial institution for specified purposes
  • A loan has a longer repayment period than a cash advance
  • Due to its long amortization schedule, the interest payment on a loan is smaller
  • Each payment period, the loan is paid off a little at a time with some of the payment going toward repayment of loan principle and some of it going to pay off interest
  • A loan can be secured by assets or unsecured
  • If based on collateral, the borrower loses the collateral if the loan is not repaid
  • There is typically an application process followed by a due diligence period where the lender qualifies the borrower to see if they pose a good risk

Merchant Cash Advances

A cash advance is not a loan. Rather, it is an advance on future receivables. As such, there are some key differences between cash advances and loans. Here are the key characteristics of a business cash advance.

  • A cash advance is typically for shorter durations, 6 months to a year
  • In order to qualify for a cash advance, the merchant must prove he has incoming receipts that can justify the advance
  • Cash advance interest payments are generally higher due to the shorter amortization period
  • They do not require collateral, therefore, you cannot lose a key asset
  • The funding entity is buying future assets of the company receiving the advance; this is usually a percentage of sales, credit card receipts, or other receivables

How to Know if A Loan or Cash Advance is Right For Your Business

If you have poor or no credit, you may not be able to get a loan. If you do, your interest rate will be high. Instead, you could get an advance where your repayment terms are a percentage of future sales and therefore easy to calculate.

If your business is small, or a startup, you may not qualify for a loan. A cash advance could be a better option.

If the amount of money you need is small, you likely will not be able to get a loan. A cash advance, however, can help your business grow and provide capital you need to see it grow.

To see if you qualify for a merchant advance, apply today. There is no risk.

No comments yet.

Leave a comment

Your email address will not be published.