Running a small business in this economy can be difficult to say the least. There are times when you know you would be able to do just a little better if you had more working capital and therefore may be interested in cash advances. This is a good place to start to learn what may be good for you and your business. You may be interested to know the difference between a business loan and merchant advance so that you are able to make the wisest decision for you.
1- Debt vs. Sale
With a loan you are incurring a debt for your business with a merchant cash advance you are selling future monies coming through the door. This will look differently on your records and will mean different things for your business coming in. There will be more flexibility with the advance than with the loan in how you pay it back and how much you will have to pay. There will be different things you may have to do if you go out of business to insure everyone gets paid.
2-No Fixed Time Period
There is no fixed time period with a merchant advance. Loans are like mortgages or car notes; you have a certain time period that is set in which to get the debt paid off. A merchant cash advance is where a company purchases an amount of future credit card receivables. They then agree to collect a percentage of what is brought in through credit transactions until they have collected what they needed to. This may take any number of months so there is no fixed time frame.
3-No Fixed Monthly Payment
When you get merchant advances you won’t have a set up that makes you pay a certain amount each month. Because the payments come from the percentage of credit card sales a company brings in a merchant cash advance will be more flexible for a business that needs working capital. Agreeing to a percentage of a debt owed will make it easier to pay off and there is a cash flow benefit. If sales go down, so will the amount you’re paying. If sales stay consistent, so will your payments.
4-No Interest Charged
On a cash merchant advance future credit card sales are being purchased for a percentage of what they would come in as. There is no interest rate because there is no fixed time period. A merchant cash advance makes money off of purchasing promised sales at a discount.
Loans have a personal guarantee which means even if you go out of business you will still be responsible to pay the debt off. With a merchant cash advance if a business legitimately goes out of business they will not be held accountable for the money owed.