Despite the popularity of revenue advance loans or merchant cash advance, there still remains a lot of confusion regarding how cash advance is different from traditional loans. After all, the financing realm is already complex enough.
Understanding the difference is essential for businesses that are either seeking a traditional business loan or want a quick and reliable source of money for their business. Traditional business loans can take several months to process whereas a revenue advance loan can provide you with capital in a relatively shorter time.
There is also the difference in how the two loan solutions are repaid. A merchant cash advance can offer more flexible terms and repayment options than a traditional business loan. Let’s take a look at two major distinctions between MCA and a traditional business loan in more detail.
Financial industry experts describe revenue advance as a lump sum or “advance” given to a business, based on their future revenues for e.g. sales revenue collected via credit card. A business can get a revenue advance in 24-48 hours after underwriting and approval.
A business loan is a capital that’s extended to a borrower by a lender. In exchange, the borrower is required to make monthly payments of interest and principal. The loan payments are based on a standard of underwriting that is assigned to a business based on its classification of risk. There isn’t any guarantee that the traditional loan will be approved. Underwriting considers the credit score of the borrower and even their personal collateral in some instances. Even if the borrower is approved for the loan, it takes several weeks or a couple of months before they are actually funded.
For a quick and reliable source of cash, a revenue advance is better for a business compared to traditional business loans. However, revenue advance is priced a lot higher than traditional business loans. Therefore, it’s essential for you to analyze whether you’re capable of repaying the advance before you enter into this financing arrangement.
Another essential detail that should be considered is the repayment process of revenue advances and traditional loans. Traditional lenders might require you to pay a large amount of money every month to service the loan. Due to this reason, a borrower can face difficulties at the month’s end, especially if an unexpected situation arises.
Revenue advance allows a business to have flexible repayment schedules. For example, if the factor rate is 1.25, a business may get access to USD $20,000 worth of money and make repayments of USD $200 per day consecutively for 125 days. The total $25,000 will be paid back. When examined on an annual basis, the rates do seem exorbitant. However, for business owners who require quick cash for an emergency situation, revenue advance can really be helpful.
We hope that you now understand the difference between a traditional business loan and merchant cash advance. Depending on your situation, choose a funding option that will be right for your business.