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.