Blurring the line between cash advances and loans

Blurring the line between cash advances and loans

However, the percentage that is collected never changes, keeping your business cash flow stable

Up to this point, we’ve talked about different types of loans, short and long, secured and unsecured business loans and even revolving lines of credit. Remember how we mentioned there was a bright side to short-term loans? There are alternative financing sources for small businesses besides loans and lines of credit. Merchant cash advances (MCA) have been around since the 1990’s and businesses in the merchant cash advance industry were the pioneers in alternative financing. MCAs aren’t a traditional business loan. In fact, they’re very different.

The fine line between the two is that an MCA provides your business with a lump sum upfront, but rather than requiring monthly installments, a cash advance is remitted using a percentage of future credit card and debit card sales or receivables withdrawn directly from your daily credit card revenue. This means that a merchant does not owe any funds until they generate sales. This flexibility provides great relief from the financial stress that may come with the other types of small business funding that we described earlier.

Simply put, an MCA does not qualify as a loan because it’s a sale of future revenue and because of that technicality, it’s not subjected to the scrutiny or regulations that are imposed on a standard small business loan. That means cash advances are a quick and easy way for merchants to acquire the cash flow they need, rather than waiting for a bank’s rigorous and slow approval process. Nor does it require a traditional payment schedule and your credit score plays no role in whether or not you qualify. In a nutshell, those are the differences between a merchant cash advance and a loan.

We know what you’re thinking, how can someone or some company buy a percentage of your future revenue from credit card sales or receivables and intercept that money automatically before you ever see it? Enter your payment processor, a.k.a. your credit card processor. Credit card processors began partnering with merchant cash advance companies to make transferring funds much easier and faster for merchants. Since payment processors already had access to a merchant’s funding account for credit card sales, it made sense to use them to streamline the cash advance process. In some cases, payment processors would offer the service and funding in-house as a compliment to their core business offering. This became more mainstream in the early to mid-2000’s.

Benefits of an MCA

There are many benefits to an MCA over a loan for small business owners. Because they are not dependent on credit scores, it’s much easier for a merchant to be approved for a merchant cash advance than a loan. The application process for a loan is also often a lot more time-consuming and complex.

Since a merchant cash advance is fulfilled based on a percentage of your future credit card sales, rather than a fixed amount, the actual amount the provider collects changes from month to month. This can be very beneficial for a merchant managing their cash flow. If you go through a slow season, the collections made on the cash advance decrease. If sales skyrocket, the collections increase. With loans, you have a fixed repayment amount, which can put a serious dent in your bank account if you’re going through a sales slump.

We know merchant cash advances can give your business exactly what it needs without complications. That’s why we offer top-rated, lightning-fast, merchant-first financing with Lightspeed Capital .

Thanks to the success and popularity of merchant cash advances, traditional small business lenders were forced to step up their game and offer fast and flexible loans in order to stay competitive.

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