MCAs and lines of credit are the two popular options for businesses that need access to cash fast. Before comparing the two its important to define what they both are.
A merchant cash advance is a type of business financing that provides a business with a lump sum of money in exchange for a percentage of the future credit card and debit card sales. Payments are usually taken out of the daily or weekly transactions. Since the business is selling a percentage of future sales it is technically not a loan.
A business line of credit is a type of small business loan. LOCs are a flexible and revolving capital that gives access to a predetermined line of cash that can be withdrawn as its needed instead of a lump sum. Once repaid the credit limit can continue to be used.
The main differences between an MCA and LOC are the qualification requirements, how funds are received, and repayment.
Application and Qualification Process
Merchant cash advances are provided by alternative financing companies, such as online lenders. This means that the qualifications aren’t as strict and less documentation is required. Only basic business identification information and records of credit card sales is asked for. The process can take as little as a few hours and businesses can receive the money within days.
Lines of credit are a loan from a bank. Banks have more stringent qualifications and sometimes require collateral for the LOC. Banks usually need to see that a business has been operating for over a year and meet annual revenue requirements. Businesses must also be able to provide extensive financial records such as financial documents, tax returns, and more. While a line of credit can be approved faster than a traditional bank loan it generally will be a longer process than an MCA.
Repayment
Instead of making one fixed payment every month for a set period of time, a merchant cash advance is repaid by a set percentage of the transactions in daily or weekly payments, plus fees.
A business line of credit has annual terms with an interest rate than can vary based on the market and a set annual fee. Payments are only made on the amount borrowed from the line of credit.
MCAs can be beneficial because they allow you to pay back the lender relatively fast. They are typically paid back in less than a year, while with an LOC interest payment can stack up and multiply depending on how quickly you use and pay down the credit line.
