#business cash advance
Merchant Cash Advance vs Business Loan
When things are going great, businesses have the cash flow they need for success and growth. During lean times or tight transitions, though, your company may need to find a cash advance loan to keep the doors open or to successfully expand. Though a myriad of funding options exists, merchant cash advances and platform lending like that offered here at Kabbage.com are two of the most popular and advantageous options.
The trick is understanding the difference between the two. Each has its own unique characteristics, and is more or less appropriate for a specific business need.
Let’s start with definitions.
What is a Merchant Cash Advance?
A merchant cash advance gives a business up-front cash, and takes payments from the credit card receipts on a regular (often daily) basis according to an agreed-upon amount. If you’ve been in business for more than a year, you’ve almost certainly received at least one phone call offering you merchant advance funding.
What is a Business Loan?
A business loan also provides up-front cash, but is paid back in monthly installments. These are usually withdrawn directly from your operations account, but terms are flexible if another method works better for your business.
For example, let’s say your company needed $1,000 for an advertising blitz in the month prior to your peak season. With that advertising in place, you would be positioned to lead the pack in your region for your industry. Without it, your competition would get the lion’s share of the business and the lost business would amount to far more than the $1,000 you would invest. But it’s been a year since the last peak season, and you don’t have the cash on hand. You need the cash, and like any smart business person you look at the two cash advance options for your business in detail.
Merchant Cash Advance vs Business Loan
Though it comes from the newer platform lending model. a Kabbage business loan is still legally a loan. This means it’s scrutinized by federal authorities and subject to limitations and enforcement. Merchant cash advances aren’t technically a loan because of how the payments are structured. This means they aren’t as regulated or carefully watched. This doesn’t automatically mean that merchant advance funding comes with abusive interest rates and contracts, but it does mean you should read and understand that contract as completely as possible.
Merchant cash advance loans approve any business that shows a history of credit card receipts sufficient to pay the money back. This makes them attractive to companies with new or bruised credit histories. Kabbage loans look at data from a variety of sources, including social sharing indicators, your cash flow reports, traditional credit reporting and industry metrics. Armed with that information, Kabbage can grant credit to struggling companies (at a higher interest rate to justify the risk), but can give lower rates to those who have earned them.
In this category, both means of lending are about equivalent. Kabbage loans deliver funds within 24 hours of approval. Most merchant cash advances work at the same speed – but not always. Ask about this if you go with merchant advance funding and need the money quickly.
Merchant cash advances take a percentage of credit card sales until the loan is paid. Kabbage loans take 1/6 th of the loan plus interest each month for six months. If your company needs flexibility that matches performance, a merchant advance might be the better option. If you want reliable, predictable costs for the borrowed money, Kabbage loans serve those goals more effectively.
For the first two months of a Kabbage loan, the interest rate is between 1 and 13 percent of the principal, based on the metrics gathered during the approval phase of the application. The rate then falls to 1 percent for the remaining six months of the loan. Merchant cash advance operations do not typically publish their interest rates. Independent analysis of a variety of merchant advance funding offers puts the average APR at more than 38 percent.
Merchant cash advances often include set-up fees, processing fees and even payment fees that can as much as double the actual cost of the loan. Kabbage loans include no extra fees. They cost as much as the “price tag” says.
Which is the better option? As with all business decisions, there’s no single good answer. Platform lending like Kabbage serves one set of business needs, while cash advance loans serve a different set. While we can’t give you a definite answer, we hope this has helped you identify the best questions. If not, watch this two minute video on Merchant Cash Advances vs Kabbage Business Loans for more information.
If you have experience with merchant cash advances versus business loans, tell us a bit about it in the comments below. Help the Kabbage community benefit from your experiences.
Jason Brick speaks internationally to small businesses after a fifteen-year career in managing companies for himself and others. His books include the best-selling Mastering the Business of Writing and upcoming Ownership Evolution. When not writing or speaking he enjoys martial arts, board games, cooking, travel and spoiling his wife and sons. He usually lives in Oregon, but is spending the year in Malaysia.
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*Kabbage can approve you in minutes when we are able to automatically obtain your business data and instantly verify your bank account. In some situations errors may occur during the sign up process, or we may need to send micro-deposits to confirm your bank account for security purposes. If this is the case, it may take up to several days to provide you access to funding.
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All Kabbage business loans are issued by Celtic Bank, a Utah-Chartered Industrial Bank, Member FDIC.