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Merchant Cash Advance vs Business Loan – Small Business Blog #loans #for #business

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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 These are usually withdrawn directly from your operations account, but terms are flexible if another method works better for your business.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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    Merchant Cash Advances

    What is a merchant cash advance?

    When you receive a merchant cash advance, your business gains upfront working capital in exchange for a percentage of future credit card sales. Merchant cash advance companies frequently partner with card processing companies to hold back a percentage of sales revenue. A merchant cash advance is also sometimes referred to as a business cash advance.

    How are merchant cash advances different from a business loan?

    Merchant cash advances are not small business loans. You are selling future income in exchange for immediate access to working capital. Instead of collecting payments to cover the advance, the merchant will automatically deduct a set percentage of your credit card sales until they recover the advance. In contrast, other small business loans can be paid back using funds from other accounts, rather than being automatically withdrawn from your sales.

    Because merchant cash advances are not loans, these agreements are not held to the same laws that regulate lenders, so interest rates can be upwards of 38%.

    Is a merchant cash advance a good fit for my business?

    Merchant cash advances offer benefits to small businesses, including payment schedule – you only pay back your advance when your business makes sales. If you have had strong sales but struggle with little or bad credit, a merchant cash advance may be a good option for your business.

    Your business typically will not qualify for a merchant service cash advance if you have a prior bankruptcy on file, if your business has been in existence for less than one year or if you do not already have the ability to process credit card payments for your customers. This segment of the lending industry is not regulated, so it’s important to understand the costs up front.

    While some small businesses may have turned to merchant cash advances in the past because they had few options to get the working capital they need, platform lenders like Kabbage are now a great option for small businesses.

    Unlike merchant cash advances, an online loan from Kabbage provides ongoing access to funding. Take what you need, when you need, and only pay fees on the amount you use.

    The biggest difference between Kabbage and merchant cash advance companies is the amount business owners pay and how rates are determined. Merchant cash advance companies typically base interest rate charges on the borrower’s credit rating – often with an APR equivalent of more than 38%.

    Kabbage, however, looks at a variety of real-time business data – not just a credit score – to determine the financial health of each business. Based on this review, monthly loans fees between 1.5 and 12% are assessed. Kabbage customers can pay off loans early with no penalties and aren’t charged any fees on the remaining months.

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