Is A Business Cash Advance A Business Loan?

A business cash advance is different from a business loan. They come in a few forms, but they all share a few things in common. The most common of these is a merchant cash advance.

There are several types of business cash advances we will go over. While these advances provide you with a lump sum, they are not loans. You do not pay them back with interest and they often don’t have credit score requirements. Let’s take a look at business cash advances and how they are best put to use.

What Exactly Is A Business Cash Advance?

A business cash advance is an advance payment to your business based on future sales. You are simply selling a portion of your future sales revenue in exchange for an upfront payment. These sums don’t carry restrictions on how they can be used, but many loan types do. As such, business cash advances are used for anything really, from repairs to inventory to bridging a gap in a business’s cash flow. These advances come in several forms.

The typical business cash advance will be a simple cash sum paid to you in exchange for a cut of your future sales, or a “royalty”. You get your sum at the beginning of your agreed term, then pay a fixed royalty, for a fixed period of time, until you’ve paid back the lump sum amount plus an extra fee. You can calculate the rate as the amount paid back, divided by the lump sum amount. You will be given a final figure to reach that you will start paying off right away. 

Merchant Cash Advance – 2 Types

A merchant cash advance (MCA) is by far the most common type of business cash advance. An MCA is an upfront cash advance based on your average monthly deposits. MCA providers will look at your recent sales data and base their offer off what they see deposited into a business checking account or processed via credit cards. Repayment can be a fixed amount daily, or a percentage of sales.

MCA Type 1 – Fixed Daily ACH

Also known as an ACH deal, the lender will ACH the fixed daily amount from your business checking account daily or weekly. They estimate this amount by looking at the average of historical deposits, and calculating a rough percentage of that, say 10%. Let’s say that’s $5,000. They will divided that amount by business days in a month (21), and pull $238 per day from your account.

Main Street Finance offers a Fixed Daily ACH product, among others.

LendingBuilder Expert Tip: If you anticipate heading into busy season, ask a lender to offer a Fixed Daily ACH, because as your sales grow, the dollar amount becomes a smaller and smaller percentage of overall sales. Because the payment is fixed and term is fixed, this type of MCA is closer to being a loan than a true advance.

MCA Type 2 – Credit Card Split

Also known as a CC Split deal, the lender will take a fixed percentage of daily sales processed via credit card terminals. This is repaid through your connected merchant account. If the repayment is 10% of daily sales, the credit card company will batch out 90% instead of the full 100%. Here your repayment terms are based on your sales that were collected through card payments. 

MCA lenders mostly do Daily CC Split products, and if you process payments with PayPal, LoanBuilder does too.

LendingBuilder Expert Tip: If you anticipate slow season ahead, opt for a CC Split deal, because as your sales go down, so will the repayment. Why? Because the repayment is a fixed percentage of sales. If sales get cut in half, the lenders collection each day gets cut in half. In a sense, this is a true advance, so ask for this arrangement ahead of anticipated slow season. Lenders are okay with it — a slowdown in revenue is a risk they take.

MCA Type 3 – Hybrid Variable ACH Split

This is rarely offered by lenders, but it’s a hybrid of the above two MCA types. This is where the lender calculates the repayment daily by looking at 10% of deposits, then manually pulling that variable amount the next day. Because this is time intensive, few do it.

MCAs are easy to get, manage and repay. Repayment is easy because in the event of an ACH Deal or CC Split, it’s basically automated. You don’t have to worry about cutting a check. Repaying an MCA can also be easier than repaying a term loan because they are just taking a percentage of your card sales, so it’s easier to budget for.

There are two main downsides to MCAs. First, they become quite expensive over time and can become a serious burden on your cash flow. Second, they usually have shorter terms compared to loans. This can make repayment a burdensome if you start missing payments.

Business Cash Advance vs Business Loan

Interest Rates vs. Royalty

Business loans carry interest rates but business cash advances don’t. Advances are just a fixed royalty for a fixed repayment amount. The term depends on whether it’s a ACH Daily deal (fixed term), or a CC Split deal (variable term) The rates you get with a business cash advance are simple portions of your revenue that will go towards repayments. 

For example, say you borrowed $10,000. with a rate of 20% (1.2). You have agreed to sell $12,000 in future sales for an upfront payment of $10,000. Then, if you make a $100 sale, you keep $80 and $20 goes towards repayment. This is just a simple example of how business cash advances work. So just keep in mind how business loan interest rates differ from the repayment methods attached to business cash advances. Business cash advances don’t amortize out like a loan does.

Speed

Business cash advances are always fast. You can always expect your cash to arrive in two business days or less. Some business loans are very fast as well, but speed is consistent when it comes to business cash advances, because the requirements are less.

Requirements

Business cash advances are the easiest category of business financing to access. Because your repayments are automated, you do not need to provide collateral in most cases. Also, while credit scores are important, many advances don’t have minimum credit score requirements.

Overall, business cash advances are easier to get than business loans.

Why Get A Business Cash Advance?

Business cash advances are becoming more popular. There are good reasons for this, including:

• Easier access
• Fast funding
• Flexible repayment plans
• Freedom to use funds however you’d like
• No collateral needed
• No risk to your credit score
• With a CC Split deal, your lender partner rides the “revenue roller coaster” with you. Shared risk is always good.

The benefits of business cash advances can be summed up with speed and convenience. Just keep in mind that there are a few reasons to be worried about taking an advance, so we only suggest you take them in the case of an emergency, inventory with a high ROI, or working capital to bridge you ahead of busy season.

The Downsides Of Business Cash Advances

While there are some strong advantages to getting a business cash advance, you need to be careful. These advances are notoriously expensive. While they won’t cost you in the same way that loan repayments do, they can cause serious cash flow problems.

No matter what kind of business financing you get, you need to be prepared for the costs. Business cash advances are a fast funding option and a short-term solution to financial challenges. So, it’s important to keep in mind how they work and prepare for the expenses you will incur with them.

Business Cash Advance Examples

Here are a few business cash advance providers for you to look at and compare.