How a Small Business Line of Credit Compares With a Merchant Cash Advance

small business line of credit

Any business that wishes to obtain funding for expansion or tackling unexpected challenges can have a hard time deciding on which course of action is the best. In the present age, there are lots of options that are available to business owners. And it appears that small businesses even have a more extensive range of options when it comes to sourcing for funding.

Alternative lending is now being explored by small business owners even as they try to keep their businesses afloat in these challenging times. A small business line of credit is often considered as a good to secure business in the face of financial uncertainties. While that might be true to some extent, it is important for a business to closely evaluate competing options. For instance, it can be useful for a business to determine which one of merchant cash advance and a line of credit will best serve its long-term purposes.

What is a merchant cash advance and what is a small business line of credit?

On the one hand, a merchant cash advance is a commercial transaction involving two businesses in which the borrowing a business sells its future receivables at a discount to a merchant cash advance provider in exchange for cash.  The cash that is obtained is factored to account for the discount, and the resulting amount is what the business pays back at the end of the day. The business pays back through daily deductions that are made from its total sales. A fixed percentage is continually deducted until the total amount has been repaid.

On the other hand, a small business line of credit is provided by a financial institution to its customer. The business is allowed for a line of credit to draw funds up to certain limit from a stipulated account. The business is made to pay interest only the actual amount that is used and not on the limit. A line of credit sometimes provides a buffer for business in case of emergency situations.  

What do a line of credit and a merchant cash advance have in common in the first place?

Before a small business line of credit is compared with merchant cash advance, it is important to examine what it is that makes them close options. For one thing, both forms of lending can be used to tackle emergency situations. But while a business line is often issued by a commercial bank to its customer, a merchant cash advance can easily be obtained from any one of the good merchant vendors out there.

Also, a line of credit once established can provide funds instantaneously to the business when it is in need without the need to go through the rigorous bank procedure for obtaining loans. Just like a small business line of credit, a business can obtain funds from merchant cash advance providers almost immediately. In spite of these similarities, there are significant ways in which a merchant cash advance differs from a line of credit.

How much can a business obtain through merchant cash advance and a business line of credit?

One area in which a merchant cash advance differs from a line of credit is in the amount that a business can be issued with. For a small business line of credit, the amount is often on average under 300k dollars; while that of merchant cash can be as much as 5 million dollars depending on the capacity of the lending company. The obvious implication of this is that merchant cash advance stands as the better option when a small business needs amounts that are much higher than it can obtain from a line of credit. This is especially important where the business cannot meet the requirement for a conventional term loan.

There are, however, certain factors that determine the exact amount that business is eligible for. In the case of a small business line of credit, the amount the business is eligible for depends on how its financial standing, credit score as well as other factors which reflect its creditworthiness. For a merchant cash advance, the amount a business can be issued with is directly proportional to the amount of monthly sales revenue it generates. Some merchant cash advance providers are known to limit the advance business is issued to 4 times its monthly sales average.

The Requirements for merchant cash advance and a line of credit

To obtain a small business line of credit business is typically required to provide some form of collateral and personal guarantee which serves as security for the lender. This is another area in which a merchant cash advance differs from a line of credit. Merchant cash advance providers do not require collateral, or any form of personal guarantee and nothing in a merchant cash advance agreement suggests it is a form loan.

That collateral and personal guarantee are required before a business is issued with funding show why businesses prefer merchant cash advance instead. After all most businesses do not have assets that can serve as collateral. There are of course other stringent requirements for obtaining a small business line of credit. Anyhow it is considered a merchant cash advance is much easier to obtain as it has less stringent requirements which the average business can meet easily.

Final Word on Merchant cash advance

Merchant cash advance has proven useful to lots of small businesses right from the time of its inception. It has sometimes made the difference between the success and failure of a business. Unlike a small business line of credit which is offered just to customers assuming that the lending institution is a commercial bank, a merchant cash advance is open to all businesses that met the few general requirements. The success of merchant lenders has been such that businesses that obtained an advance in the past were inclined to do so again. So far so good, the merchant cash advance industry, in general, has lived up to its expectation in providing funds quickly to businesses in dire need.

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