Difference Between Merchant Cash Advance And Business Loan

If you're a small or medium-sized business owner in India, chances are you'll need financing at some point to expand your operations or explore new opportunities. As funding options, there are two popular choices- business loans and merchant cash advances. But which one to go for? For this, you would need to understand merchant cash advance vs business loan in depth.

So, let us explore merchant cash advance vs loan (business). By the end of this article, you'll have a clear understanding of which financing solution is right for your business needs. 

What is a business loan?

A business loan is a traditional form of financing where a lender provides a fixed amount of money to a borrower. This loan comes with fixed monthly payments over a specified period, known as the loan's maturity date. The repayment amount includes the principal borrowed and the business loan interest charged by the lender.

One key advantage of taking out a business loan is that it offers lower overall costs compared to other types of financing options. The interest rates on business loans are typically lower than those associated with merchant cash advances.

What is a merchant cash advance loan?

A merchant cash advance (MCA) is an alternative financing option primarily designed for businesses that rely on credit card sales. In this arrangement, lenders provide an advance based on a percentage of the borrower's future credit card sales. The repayment is done automatically as a portion of each credit card transaction.

One major advantage of opting for an MCA is the absence of collateral requirements. Unlike business loans, merchant cash advances do not require borrowers to pledge any assets as security.

Key differences: Merchant cash advance loan vs business loan

Here's the comparison between merchant cash advances (MCAs) and business loans in the form of a table:

This table provides a concise comparison of the key differences between merchant cash advance vs business loan, allowing businesses to make informed decisions.

When to consider taking a business loan?

While both business loans and merchant cash advances have their advantages, there are specific situations where a business loan may be your best bet:

• If you have a positive credit history without any defaults or tax-related issues, you'll likely qualify for favorable terms and conditions on a business loan.
• If you need significant funding to support your growth plans or undertake substantial projects. This is particularly true if you have valuable assets to offer as collateral.
• When you know exactly how much you need to repay and at what intervals, allowing for better budgeting and financial planning.

When to consider taking a merchant cash advance loan?

Merchant cash advances are better suited for certain situations when:

1. Businesses are seasonal
2. No collateral is required 
3. Business merchants operate online

Conclusion

Exploring merchant cash advance vs loan (business), we have found that choosing between them depends on various factors specific to your business needs and circumstances. While business loans offer stability and well-defined repayment terms, merchant cash advances provide flexibility and convenience based on your actual sales.

If you are looking to apply for business loan, Mahindra Finance is your ideal partner. Mahindra Finance offers a range of financial solutions tailored to meet the needs of Indian businesses like yours.

FAQs:

Q1: What is the business loan interest in India?

The business loan interest in India varies depending on factors such as the borrower's creditworthiness, the loan amount, and the repayment period.

Q2: How does a merchant cash advance loan affect my credit score?

Merchant cash advances do not have a direct impact on your credit score since they are based on your sales history rather than your credit.

Q3: Can I switch from a merchant cash advance to a business loan?

While it is possible to transition from a merchant cash advance to a business loan, it is subject to the terms and conditions set by the lender.

Q4. Is merchant cash advance a good idea?

Some merchant cash advances have APRs as high as 200 per cent of the total loan amount. This can be very costly while repaying loans.

Q5. Are MCA personally guaranteed?

MCAs are unsecured funding, so one doesn't offer any business or personal assets as security.