Five Reasons Why A Merchant Cash Advance Is Better Than A Bank Loan

An article by Wayne Jordan    No Comments

There’s been a lot of discussion over the past decade about merchant cash advances, and whether or not they are better than a bank loan.  Small business owners who use the advance as a financial tool say that they do so for the following five reasons:

No Fixed Repayment Period

No matter what kind of loan you get: mortgage, auto, or personal, there is always a fixed repayment period.  Generally, a mortgage is fifteen or thirty years, a car loan five or six years, and a personal loan three years.  Sure, you can pay it off early if you are able.  But, in the meantime, the bank has your equipment, house, or other asset as collateral.

With a merchant cash advance, you simply agree to sell a certain percentage of your credit card receivables at a discount to the cash advance provider.  The provider collects the payments directly from credit card receipts.  The time it takes to repay the advance will vary according to your credit card sales.   

No Fixed Monthly Payment

No matter what, you know that you will be making the same monthly payment to the bank every month for the life of the loan. 

Repayment of a merchant cash advance is much more flexible.  Since your sales will vary from month to month, the amount collected by the provider will vary from month to month. 

Benefits Cash Flow

The problem with making a fixed monthly payment on a bank loan every month is that there isn’t always money available to make the payment.  When business is good, and you have plenty of cash, it’s easy to make the fixed payment.  But, when sales are down, making your payment is a struggle.  If you can’t make the payment, you are in default of the loan.  Your delinquency will be reported to the credit bureau, and your credit score will be affected.  When your credit score goes down, it will affect the interest charged on your credit cards and the amount you pay for insurance.  Your ability to borrow in the future will be negatively affected.  In a worst-case scenario, the bank can seize your collateral.

A merchant cash advance is cash-flow friendly: you pay more in good months, less in slow months.  Simple.

No Interest Rate

Banks charge interest on their money.  They have lots of complicated formulas to arrive at what interest rate they will charge you.  Your creditworthiness, risk factors, collateral, and repayment term will all be considered when they decide how much interest you will pay.

Interest is not charged on a merchant cash advance; it can’t be.  Interest calculations are based on borrowing a fixed amount of money for a pre-determined amount of time.  Since a cash advance has neither fixed payment or fixed length of time, interest cannot be calculated.  Instead, a portion of a business asset – credit card receivables – is being sold at a discount.

No personal guarantee

If your business doesn’t repay a bank loan, they can come after the loan signer for the balance due.  The persons who signed the loan document: all of them; are responsible for the repayment of the loan.  Failure to repay can result in wages or bank accounts being garnished and liens being placed on homes or other assets. 

Merchants do not personally guarantee their credit card advances.  Of course, merchants who fraudulently enter into a merchant cash advance are open to prosecution.  For honest merchants who operate with integrity, a merchant cash advance is a valuable financial tool.   

There will likely still be much discussion about whether or not a merchant cash advance is better than a bank loan.  Only you can decide which is best for your business.  But for many small businesses today, the above five reasons are convincing.