Is a Merchant Cash Advance a Better Option than SBA Finance?

sba finance

Often, a business might be required to make a choice between two financing options. It is important that a business knows exactly where it should turn to for whatever kind of loan that it seeks. And, it is also important the business makes the right decision in this regard as not doing so could come back to haunt the business. Any business that fails to make optimal financing decisions in these difficult times can expect to be facing serious cash flow problems that could result in its closure. For instance, a business should be able to choose between SBA finance and merchant cash advance if it has sufficient information on the sources of funding. Once a business has gained sufficient information it would be able to make the decision that would help further its interest. It might, at first, appear that there is no basis for comparing merchant cash advance with SBA finance; however, if one considers it that small business administration financing is representing the entire world of traditional financing through commercial banks, and that merchant cash advance is representing the alternative industry, then one can see comparing both of them to be on way of understanding how the alternative finance industry compares with the traditional lending institutions.

Read More: Benefits of Small Business Financing by Merchant Cash Advance Providers

What is SBA Finance?

Because obtaining loans from commercial banks became extremely difficult over time, the government began looking at ways in which it could encourage banks to issue out loans to businesses, especially small businesses. The non-availability of bank loans to small business is probably at an all-time high since for the first time commercial bank lending to small businesses has dropped by over 20 percent while lending to big firms has witnessed an increase of 7 percent.   This is something that is quite troubling considering that small businesses are responsible for the employment of more half of the entire United States workforce, accounting for 2 out of every 3 new employment in the country. So, the government in a bid to boost financing to the small business sector created the small business administration with a mandate to back small business loans. Banks who partner with the small business administration to make the so-called SBA finance available have the risks inherent in the loan transferred to the small business administration. When the SBA approves a loan it promises to pay back the loan if the borrowing business defaults. The small business administration is, however, is not necessarily responsible for paying back the whole loan. In most cases, it guarantees about 80 percent of the entire loan. So if the business defaults it is that fraction the SBA is required to pay back. The bank, in that case, bears the risk for the remaining part of the loan.

What role does the Small Business Administration play in the loan application process?

Unlike as in merchant cash advance where the business applies directly to the lender and everything is sorted out between the two of them, SBA finance involves a third party which is the small business administration. The small business administration is responsible in some cases for underwriting the loan; in other cases, however, it could allow the partnering bank to underwrite the loan while reserving the right to make the final decision. It is also the responsibility to decide which banks are able to offer SBA finance. In order for a bank to partner with the small business administration in making funds readily available to small business owners, it has to have had a prior history of being committed to helping small business grow by making credit facilities available to them. The federal organization, in addition, will often insist for the business to have been in operation for somewhere around 10 years. So, the role of the small business administration borders on supervision and approval of the SBA finance process.

How is SBA financing limited, and in what way is merchant cash superior?

The main reason why business owners have often favored SBA financing is due to the low-interest rates that are associated with the program. Since a bank would normally interest based on the amount that is borrowed and the risk involved, it is able to charge lower interest of the small business administration backed financing since it only bears a tiny proportion of the risk involved. In spite of this benefit of lower interest rates and longer payment period, there are serious limitations to SBA finance.  The main problem with SBA financing is that a business is still required to provide security for the part of the loan that is not backed by the small business administration. This means that businesses are still made to provide collateral probably in the form of real estate before it can be considered for the small business administration financing. Some banks even go as far as insisting that the business owners provide personal guarantees which make them personally responsible for paying back the loan if the business fails. This fact has made SBA finance practically out of the reach of the vast majority of business owners. Meanwhile, the amount of money that can be obtained through SBA financing is, on average, not up to 400 thousand dollars.

In a merchant cash advance, however, there is no requirement for collateral, neither is there any requirement for personal guarantees. In addition, the amount of money that can be obtained through merchant cash advance is much higher that which can be obtained from SBA finance, meaning that a merchant cash advance is a better option when larger sums of money are sought. In addition to all of the problems that have been listed, other bogus requirements for conventional bank loans apply to SBA financing. For instance, banks would still insist that the business has very strong positive cash flow as well as possess an excellent credit score. It is for all these reasons that it appears that the small business administration has been able to effectively up bank lending to small businesses since it is virtually the same challenges that business owners in conventional loan applications that they still come to face when applying for SBA finance.

Taking a close look at Merchant cash advance

A merchant advance is an alternative source of funding and as such does not have much in common with the small business administration financing. The only possible similarity between a merchant cash advance and SBA financing is that they both involve issuing cash to a business that is in dire need and expected it to be paid back at some time in the future. Also, both require the business owners to pay some of the charges for the service. In the case of SBA finance, the banks charge the usual interest rate even though it is much lower; while for merchant cash advance instead of interest businesses are made to pay a fixed fee for the service. There are other differences between a loan and a merchant cash advance. In a loan transaction, the terms are fixed and the business is unable to meet up with payments for whatever reason it can expect to be punished. And if the business makes payments much earlier than expected it could be rewarded with lower interest rates. In a merchant cash advance transaction, there is no specific time which the business is expected to complete the payments.

Read More: The Best Unsecured Business Loans of 2018

The reason is that most of the time the business opts to repay the advance with a fixed percentage of its daily credit sales instead of paying a fixed amount on daily basis. This means that the time it will take to repay the loan will be a function of business conditions. Although merchant cash advance providers typically expect their funds to be recouped within a year, it is not always the case since business conditions could fluctuate quite easily. So the business gets to pay more when sales are up and less and when sales are down, ensuring the exact time the advance is going to be repaid cannot be known in advance. In a nutshell, merchant cash advance involves a business selling its future credit sales in exchange for quick cash. The actual amount issued to the business is multiplied by a factor of less than 1.5 in order to arrive at the total payable amount. Then, both parties agree on the percentage of the daily credit sales that would be remitted to the merchant cash advance provider on daily basis. As soon as both issues have been concluded and the merchant cash advance agreement signed, cash is made available to the business. This process is obviously faster, easier, and more reliable than SBA finance.


Having taken a look at merchant cash advance and SBA finance, it is quite obvious which one of them is a better option for a business in dire need of business funding. Merchant cash has always been preferred to small administration financing because of the fact that it is unsecured, fast, easy, and does not even require a good credit score. Although merchant cash advance is relatively more expensive than SBA finance, it remains the surest means of obtaining small business funding


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