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Loans vs. Cash Advances: What you Should Get For Your New Business


Getting funds for a new enterprise is one of the primary challenges young entrepreneurs face today.

Grants, angel investors, partners and crowdfunding campaigns are all viable solutions to cash shortage but, in most cases, a new business owner only has two funding options: a business loan or a merchant cash advance. These two are the only choices guaranteed to give you the finances you need when you need it.

That said, the similarities between cash advances and loans end with both of them providing capital. How they do it, and what they mean to the business is entirely different. Consequently, many merchants are often left at a fix, trying to decide which of the two options is right for their operation.

To help you figure out when to use which, let’s expound on the strengths and weaknesses of loans and cash advances.

Business loans

Business loans are issued by a bank or independent lending institution, like Summit Financial, specifically for business purposes. Like all loans, they come with a repayment period, fixed installments and an interest rate.

A business owner may prefer a business loan for several reasons. For starters, some merchants find it easier to budget when they have a fixed monthly installment to pay, and they know how long it’ll take to repay the loan fully. Additionally, banks often allow for earlier repayments, which allow a borrower to clear the loan fast and avoid high interests.

On the other hand, loans come with strict eligibility requirements and often require a borrower to have good personal credit. Moreover, if sales get slow, you’ll still be required to make full payment to make at the end of the month.

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Merchant Cash Advances

A cash advance differs from a loan in that the provider hands a merchant the requested funds in exchange for a specified amount of revenue got from future credit card sales. In other words, rather than having to make fixed payments monthly, you’ll be servicing the advance with small percentages of your daily sales.

The best thing about cash advances is repayment is based on sales. If your sales get slow, you’ll pay back a smaller amount. They’re also easier to repay because instead of a fixed repayment term, money is just deducted from your sales until you’ve fully serviced the advance.

However, cash advances don’t give the applicant an option to repay sooner. Furthermore, in place of a good personal credit, a provider will need proof of steady credit card sales. Small or newly started businesses will, therefore, find it hard to score an advance.

Which is better?

Ultimately, your business will determine the option you choose.

If for instance, you run a high-risk business or have bad credit, it’ll be easier for you to qualify for a merchant cash advance from a high-risk specialist like First American Merchant, than a business loan from a bank.

Whichever option you choose, keep in mind that both funding methods are financial obligations that should be taken seriously.

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