Two popular financing options available to a small Business owner are the Merchant Cash Advance (MCA) and the Business Line of Credit. Each financing product has their strengths and best type of use for a business. Let´s look at the differences in these two popular financing products.
Merchant Cash Advance (MCA)
The small business MUST process credit cards as a form of payment, generally with a minimum average monthly amount. With merchant funding, the business receives an upfront sum of cash in exchange for a portion of future credit sales. The business makes daily payments, based on a percentage of credit card transactions automatically being deducted. There is no minimum fixed amount deducted. This is NOT a loan.
Listed below are features of a Merchant Cash Advance:
- Ease of Qualifying – Business history of 3 to 6 months processing credit cards
- Minimum Documentation – Basic business owner information, 3 months credit card statements
- Rapid Funding – Normally one week or less
- Repayments – Monthly payments are a percentage of credit card invoicing
- Flexibility – Repayment allows for seasonality of business activity
- Cost – Higher versus alternative finance options
Business Line Of Credit
The small business does NOT need to process credit cards. The business receives a pre-established amount of credit from the financial institution, that is available for use as needed, subject to making interest payments. The business makes monthly payments on the outstanding balance. This is a loan.
Listed below are features of a business Line Of Credit Loan:
- Stringent To Qualify – Business history of one or more years and higher annual revenue
- Extensive Documentation – Owner and business tax information, incorporation documents and financial statements
- Slower Funding – Normally one month after documents submitted
- Repayments – Monthly payments are a percentage of outstand credit used
- Less Flexibility – Repayment does not allow for seasonality of business activity
- Cost – Lower versus alternative merchant cash advance options
Because of the differences between these two financing options, some businesses will benefit from one more than the other. A landscaper, for example, who is usually paid in cash would not necessarily be well-suited for a merchant cash advance because of the few credit card transactions. Instead, he might want a business line of credit to help him meet payroll when business is slow during winter months.
A merchant cash advance and a business line of credit can both be a great fit for certain businesses. For example, a retail store may need a rapid lump sum of cash to fix unexpected damage to the storefront, but also need access to capital to bridge the gap between payroll cycles.
Assuming your business make a relatively high number of credit card transactions and can qualify for a business line of credit, these two finance options could efficiently solve both your business issues. The business line of credit could act as a stopgap measure anytime you need help meeting payroll and the merchant cash advance would ensure that you have capital on hand necessary to make a large, one-time investment.
A Merchant Cash Advance and Business Line Of Credit differ in three main ways: 1) business qualifications, 2) how the business receives the funds and 3) how the funds borrowed are repaid. A business owner should evaluate these financial options based on these three categories and their immediate and long-term affects.
Please call us at (888) 213-3383 to help review which financial product best serves your business needs or Contact Us via Email.
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