Nearly every small business needs a little extra funding from time to time. This is especially true if your company is just starting out or if you’re taking on a new challenge.

Often, the key to achieving financial success is identifying the optimal loan or cash advance for your business. But how do you know if a cash advance or a loan better suits your situation?

What’s the difference between cash advances and loans anyway? It’s a fair question because, in principle, they’re similar, but in practice, they vary greatly.

Business loans are paid back with set terms and payments over a predetermined period of time. Merchant cash advances, on the other hand, are paid back based on and through credit card sales, depending on your daily or monthly credit card transactions. Payments can vary from month to month, which eliminates the stress associated with large unexpected payments.

The good news – Once you understand the difference, you can begin to formulate a funding plan that will help your business reach new heights. Let’s take a look at each a little more in-depth

What Are Business Loans?

Most business owners will probably be familiar with the anatomy of a loan, but just as a refresher, we’re going to go over it again.

A business loan is usually fairly straightforward: a lender agrees to give a business owner an amount of capital upfront, and in return, the business owner agrees to pay that amount back over a period of time with interest.

In general, that business owner will pay a minimum amount of the loan sum and the interest on it back once a month. And if the business is doing well, they can put more money down to shorten the length of the loan or else extend the loan if needed.

Note also that there are a number of different loans under the “business loans” umbrella, including SBA loans and loans without collateral.

What Is a Merchant Cash Advance?

A cash advance is like a loan in that the lender agrees to give a business owner a certain amount of money upfront with the promise of repayment at a future date. That much remains the same between the two. The difference lies in how the forwarded sum is paid back.

In a cash advance, a company pays back a percentage of its credit card sales to cover the forwarded sum –– usually after a day or week of business. So rather than requiring a set payment amount at the end of the month, a cash advance will instead take an agreed-upon portion of credit card sales.

This means that a business is only charged for the money they make. Because that can vary day-by-day, week-by-week, it means that payments on a cash advance will vary also. Lean times will yield smaller payments, while successful months will, in turn, produce a higher payment.

Key Differences Between Loans and Merchant Cash Advance

Let’s break down the cash advance vs. loan differences.

Criteria Business Loan Cash Advance
Structure Provided in a one-time, lump-sum payment in most cases. Other loans can have delayed draw periods, where the borrower takes a percentage of their amount. Provided in a one-time, lump-sum format.
Repayment Daily, weekly, or monthly payments, depending on your contract. Monthly payments are more common for longer-term loans. Daily or weekly payments are taken directly from your incoming sales. In some cases, you’re given a fixed amount to pay on a set schedule.
Interest Rates Interest rates vary depending on your business, the lender you’re working with, the product you’re choosing, and the economic conditions surrounding your transaction. In 2023, rates range from 8% to 50%. Not an interest rate – a factor rate.

Factor rates range from 1.1 to 1.6. Multiply this number by your funding amount to determine how much you pay for your financing.

Length of Contract Short to long-term, depending on your needs. Generally short term. Contracts rarely extend longer than 18 months.
Requirements Each lender has different requirements, but the most common criteria are your time in business, annual revenue, and credit score. Compared to business loans, cash advances are much easier to qualify for. Lenders focus more on your profitability than other qualifications.
Uses Can be used for any business purpose. Can be used for any business purpose.

Pros and Cons of Loans vs. Merchant Cash Advance

Now that you understand the differences, let’s break down the pros and cons of each financing option.

Type of Financing Pros Cons
Business Loan
  • High funding amounts
  • Flexible repayment schedule
  • Various formats to choose from
  • Straightforward repayment schedule
  • Ability to use the funds for a variety of purposes
  • Can have high interest rates
  • Longer underwriting processes
  • Documentation requirements
  • Qualifications are difficult to meet for less established businesses
Cash Advance
  • Fast funding times
  • Limited paperwork required
  • Lesser eligibility requirements
  • Ability to use the funds for a variety of purposes
  • Can have high fees
  • Smaller funding amounts
  • Limited to lump sum funding
  • Complicated if you don’t understand factor rates

Business Loans vs. Cash Advance: What Are the Uses?

Fortunately, the use cases for business loans and cash advances are generally the same. You can use the funds for any business purpose, including:

  • Equipment
  • Inventory
  • Materials/supplies
  • Payroll
  • Gas and fuel
  • Technology
  • Bridging capital gaps
  • Down payments for new locations
  • Buying out partners
  • Expansions and renovations

In some cases, business loans require the borrower to disclose their intended use of funds to their lender before they’re approved. Still, as long as it’s for a business purpose, most borrowers are able to move through this stage quickly.

Qualification Process: Loans vs. Merchant Cash Advance

Qualifying for a loan is a bit more difficult than a cash advance because of the credit score requirement at a majority of lenders. A traditional loan requires the borrower to meet minimum credit score, annual revenue, and time in business requirements, whereas a cash advance focuses on the latter two.

Unlike cash advances, loans often come with personal guarantees or collateral requirements. This is to “secure” the financing. Cash advances are largely unsecured because your future sales are what drive your repayment.

Some companies that can meet loan requirements choose cash advances simply because they fund faster and require less documentation. Others opt for a traditional loan because they have business collateral and prefer a more extended schedule. There’s no “best” option for every business; The right one will depend on you, your business, and your needs.

How to Apply for a Cash Advance or Business Loan Today

Applying for a loan is almost identical to applying for an advance. Here’s a breakdown of the steps.

  • Find a list of 5-10 lenders you could work with
  • Research each option
  • Consolidate your list to a few top choices
  • Visit their website and complete an online application

If you’re still unsure what route works best for your specific circumstances, don’t fret. You can contact National Business Capital’s team today at (877) 482-3008. We have experience in a myriad of industries and will help your company secure the funds you need.

Or, if you already know the type of financing you’d prefer, fill out our 60-second online application today to get the funds you need in as little as 24 hours.

Business Loans & Cash Advances: The Bottom Line

There are pros and cons to both business loans and cash advances; with a loan, you’ll know exactly what you’ll owe each month and can plan accordingly.

And with a cash advance, you’ll never have to pay more than you can afford –– because it functions around your own sales. The good news is, now you understand the difference between cash advances and loans –– so you can make the best call for your business.

Learn More About Business Cash Advances and Loans in Your Free eBook

For more information, check out our free eBook on all the opportunities your business can enjoy –– provided you get the proper funding!


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