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Updated: March 27th, 2020
So you’re looking for business financing. Seems simple enough, right? Term loans, merchant cash advances, credit cards, invoice factoring, venture capital… when you start digging in, the options can quickly become overwhelming!
To help you select the best option for your business, let’s compare and contrast two of the most common financing products for established businesses: business term loans and merchant cash advances (MCAs).
A merchant cash advance (MCA) is generally designed as an option for businesses that need a small injection of money quickly, and for a very short period of time. For example, an MCA may be appropriate to consider if your business needs $10,000 to meet an unanticipated surge in customer demand, or to cover an emergency expense like a burst pipe or the sudden loss of a key client.
Almost any business can get approved for a merchant cash advance in just a few hours — however, that speed can come at a steep price. You could potentially pay for that quick turnaround and superficial underwriting process with dangerously high interest rates.
Typically, you’ll repay an MCA daily (or sometimes weekly), with the provider taking a portion of your sales until the debt is repaid. Daily payments can dramatically change the total cost of your loan and sometimes make shorter-term cash advance rates appear less expensive than a term loan at first glance. However, some APRs (all costs for one year in a single equivalent interest rate) for MCAs can turn out to be upwards of 70%!
(For more info, check out our in-depth guide on merchant cash advances)
A term loan works a bit more like what you might expect from a bank: you apply to borrow a set sum of money over a set period of time, and you and your business financials are evaluated to determine an appropriate interest rate. Once approved, you receive the money and start making repayments on a set schedule, allowing you to plan and budget well in advance.
Term loans tend to offer a bit more money — think anywhere from $25,000 to $1 million, depending on the lender, over one to ten years. Your interest rate will be either fixed (meaning that it won’t change over the life of your loan) or floating (meaning that it may vary according to the financial market). Be sure to ask your lender about the details of their term loan offerings to find out whether their product fits your business’ needs. (For more info, check out our in-depth guide on term loans)
When you’re in the market for a source of funding to get your business through a tight spot or to fuel some needed growth, it’s important to keep the big picture in mind.
It can be difficult to do a straight-line comparison of a merchant cash advance to a standard small business term loan based on the way the two financial products are structured. A good lender will always be willing to help you calculate an APR, so that you can accurately compare the true cost of these financing options.
And how does Funding Circle term loan stand out? For one, it takes just a few minutes to apply and you can get a decision in as little as 24 hours. Our most creditworthy applicants receive fixed rates that are competitive with traditional bank loans, and because we believe in an honest, transparent borrowing experience you’ll know exactly how much you have to repay each month with no hidden fees or prepayment penalties.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.