The Differences Between A Merchant Cash Advance vs. A Business Loan

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Home » Business Finance » The Differences Between A Merchant Cash Advance vs. A Business Loan

What are the advantages and disadvantages of a merchant cash advance compared to a business loan?

If you are looking to borrow money for your business and you take payment via a card terminal you have the option of a business loan but another option that you may not be so familiar with is taking out a merchant cash advance.

Merchant cash advances are a relatively new form of finance and one which has been heralded by the government that effectively gives businesses access to finance based on that business’s future sales through card terminals.

The differences between business loans and merchant cash advances:

Merchant Cash Advance Business Loan
Minimum Business Age Trading for 6 months Typically trading for 3 years
Credit History All credit histories welcome Good credit history required
Cost of Borrowing A factor rate typically between 1.05 and 1.20 times the amount borrowed Typically an interest rate of around 4-6%
Repayments Flexible daily repayments as a percentage of your daily card sales, typically 10%-20% Fixed repayments for the duration of the loan

The main disadvantage of a merchant cash advance it is usually a more expensive way to access funding compared to business loan. If, for example you want a merchant cash advance for a restaurant and you want borrow £10,000 to fund the purchase or new equipment with a merchant cash advance. You may be offered the advance at a factor rate of 1.15, which would mean you will end up repaying £11,500.

However, there are a number of positives to a merchant cash advance (business cash advance) including the fact that repayments are based on a percentage of your daily card sales. This can be a big help to a business’s cash flow as during busy months you are paying more towards the amount you borrowed and equally during quieter trading times you are still paying a set percentage of your daily card takings. If you were to take out a business loan you would have a set repayment figure each month that does not take account your company’s performance, potentially making it hard to repay the loan during quieter trading periods. If cash flow is a key reason behind your business borrowing requirement, you may find that an invoice finance product is more suited to your needs.

Quote Goat work with a provider that offers both merchant cash advances and business loans and they can talk you through which one is suited to your needs when you apply via the form on our merchant cash advance page here.