Merchant Cash Advances vs. Loans: Which is Best for Small Business Financing?

Updated on:
April 15, 2024

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Small business owners often face the challenge of choosing the right financing option to meet their business needs. Two popular options are merchant cash advances (MCAs) and business loans. This blog post will compare these two financing options, highlighting their pros and cons, to help small business owners make an informed decision.

Merchant Cash Advances (MCAs)

Merchant cash advances (MCAs) are a type of short-term financing that provides businesses with a lump sum of cash in exchange for a percentage of future sales. Unlike loans, MCAs are repaid by deducting a portion of the business’s daily sales until the agreed-upon amount is paid off.

MCAs are typically used by small businesses with difficulty obtaining bank financing due to poor credit or a lack of collateral. MCAs offer a quick and easy way to access capital. As with any financing option, it’s important to carefully evaluate a merchant’s cash advance’s terms and costs before deciding if it’s the right option for your business.

Pros of MCAs

  1. Easy application process: MCA providers usually require minimal documentation, such as business statements from your bank account, making the application process faster and simpler than business loans.

  2. Fast approval: The approval process for MCAs is typically faster than for loans, with funds often available within a few days. This is because MCAs are based on the revenue of the business, rather than the business owner’s credit score or financial history. To qualify for an MCA, a business must typically be in operation for a certain amount of time and have a minimum amount of monthly revenue. The MCA provider will typically review the business’s bank statements to determine how much business funding they qualify for.

  3. Flexible repayment* terms: Repayment amounts are based on a percentage of daily sales, making them more flexible than fixed loan installments. This means that if the business has a slow month, the repayment amount will be lower. Additionally, MCAs often have no set repayment term, meaning that businesses can take as long as they need to pay off the advance. This flexibility can be beneficial for businesses with irregular or seasonal revenue streams, as it allows them to adjust their repayment schedule to match their cash flow.

  4. Credit score flexibility: MCAs are often available to businesses with bad credit, as the focus is on revenue rather than credit history. While other forms of financing require excellent credit, MCAs are more focused on projecting future revenue in order to finance businesses.

Cons of MCAs

  1. Higher costs: MCAs generally have higher factor rates than loans, leading to a higher total cost of financing. Unlike small business loans or other funding options, MCA providers make money using a factor rate, not an interest rate. That factor rate is multiplied by the upfront advance amount to determine the total repayment amount. Because the repayment amount doesn’t change, paying an MCA back quickly can make them effectively more expensive. However, some MCA providers will provide an early repayment discount so this can help reduce the cost.

  2. Short-term solution: MCAs are typically designed for short-term financing needs and may not be suitable for long-term business investments. Many MCAs have repayment periods lasting just a few months up to 18 months.

  3. Impact on cash flow: The repayment process, which involves daily payments based on sales, can strain a business’s cash flow.

Business Loans

Business loans are a type of financing provided by banks, credit unions, or other financial institutions to businesses in need of capital. These loans typically have fixed terms, interest rates, and payment schedules, and are secured by collateral such as real estate or equipment. These loans are often used to fund long-term investments, such as expanding a business or purchasing new equipment, and can be used to finance a wide range of expenses. To obtain a business loan, a business must typically provide documentation demonstrating its financial stability and creditworthiness, including financial statements, tax returns, and credit reports. While business loans offer lower interest rates than other types of financing, they can also have strict requirements and longer approval processes.

Understanding Business Loans

Business loans are provided by banks, credit unions, or online lenders, offering a fixed amount of money to be repaid over a set period of time, usually in the form of monthly installments.

Pros of Business Loans

  1. Lower interest rates: Business loans typically have lower interest rates than MCAs, resulting in a lower total cost of financing. In addition, paying off a loan quickly can lower your total interest paid since your annual percentage rate (APR) is calculated based on the remaining principal.

  2. Longer repayment terms: Business loans offer longer repayment terms, providing businesses with more time to generate revenue and repay the loan. That can also result in lower payment amounts in the long term.

  3. Wide range of loan types: There are various types of business loans, such as term loans, SBA loans, and business lines of credit, catering to different business needs. Some bank loans can be used exclusively as working capital while others are best used to buy real estate or large equipment.

Cons of Business Loans

  1. Strict eligibility requirements: Business loans often have stringent credit scores and financial history requirements, making them difficult for some businesses to qualify. Qualifying for a loan can require a good credit score, an examination of your financial history, and even a look at your personal credit score.

  2. Lengthy application process: The application process for business loans can be time-consuming, requiring extensive documentation and often taking weeks or even months for approval. Merchant cash advance providers can sometimes fund you within a single day.

  3. Collateral or personal guarantee: Business loans may require collateral or a personal guarantee, putting the borrower’s personal or business assets at risk.

Choosing the Right Financing Option for Your Small Business

To determine the best financing option for your small business, consider the following factors:

  1. Business needs: Assess your business’s financial needs and objectives. If you need quick access to funds for short-term needs, an MCA may be a suitable option. A business loan might be a better fit for longer-term investments or larger loan amounts.

  2. Credit score and history: If your business has a strong credit history, you may be able to secure a loan with favorable interest rates. If your credit is less than stellar, an MCA may be a more accessible financing option.

  3. Cash flow and sales volume: Evaluate your business’s cash flow. An MCA might be more suitable if your cash flow is irregular.

  4. Total cost of financing: Calculate the total cost of financing for both options, considering interest rates or factor rates and any additional fees. Choose the financing option that offers the most cost-effective solution for your business needs.


Choosing between a merchant cash advance and a business loan ultimately depends on your business’s unique needs, financial situation, and objectives. By carefully evaluating the pros and cons of each financing option, you can make an informed decision that best supports your business’s growth and success.

*Repayment in this context describes the process of repurchasing a merchant cash advance. It does not describe the process of repaying a loan. MCAs are legally distinct from loan products.

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