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Choosing Between Merchant Cash Advances, Loans & Lines of Credit: How to Get Financing That is Right for Your Business

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There’s no doubt about it—it can be hard to get the right kind of business financing that meets your needs. No matter how much research you do, there’s always something you didn’t think of or a cost you didn’t anticipate. That’s why it pays to have financing options at your disposal, so you can be sure to have enough cash flow to take care of those unexpected expenses and keep things running smoothly.

When it comes to getting started with e-commerce financing options, some of the best ways to do that is by getting a line of credit or getting financing based on credit card sales. In this blog, we’ll go over the pros and cons of each option to help you choose one that suits your business. So let’s take a look at them.

Line of Credit (LOC)

What Is a LOC?

A line of credit (LOC) is a credit account that allows you to take the money and pay it back over time. A line of credit differs from other types of loans by allowing you to access the funds you need.

For example, if you have a credit card with a $10,000 limit and you spend $3,000 on your card each month, your available balance will be $7,000 ($10,000 – $3,000). This means that when you need more money for an emergency expense or to make an additional purchase, you can use up to $7,000 without having to reapply for another loan.

Types of Lines of Credit

There are many different types of lines of credit. Here are the most common:

Personal Line of Credit

A personal line of credit is a loan that you can use to make purchases, pay off bills, or invest. You will have to pay interest on the money you borrow, but it’s flexible and easy to get.

Business Line of Credit

Business lines of credit are typically used by businesses that need more capital than they have on hand. They’re also useful for businesses with seasonal cash flow problems or unexpected expenses like emergencies or equipment breakdowns.

Securities-Backed Line of Credit (SBLOC)

SBLOC is a special type of financing that’s backed by securities rather than by collateral. This type of lending is typically used for commercial purposes, but they’re available to consumers as well.

Pros of Lines of Credit

  1. Low-interest rate. The interest rate on lines of credit is typically lower than that on a traditional loan. This can help you save money over time if you plan to borrow regularly over several years.
  2. Borrowing limit. A line of credit’s borrowing limit is usually larger than what you’d get with a traditional loan which means you can borrow more at once if needed.
  3. Flexibility in repayment options. You can generally choose any repayment option that’s convenient for you, including monthly payments or lump sum payments.

Cons of Lines of Credit

  1. Higher interest rates than loans that use collateral. A line of credit is still lent funds, so it has its interest rate. Some accounts charge as much as 18 percent or more. That’s significantly higher than the interest rate on most mortgages or auto loans.
  2. Overspending. Because there’s no set limit on your line of credit balance, it’s easy to overspend on your account if you aren’t careful.
  3. Misuse of a LOC can hurt credit score. If you make late payments on your LOC, it will damage your credit score.

Financing Based on Credit Card Sales

Financing based on future credit card sales is a type of financing that can help you to purchase goods or services and pay for them later. It’s called merchant cash advance (MCA).

What is a merchant cash advance?

A merchant cash advance (MCA) is an alternative financing option available to small businesses that want to access capital quickly. MCA is typically ideal for businesses that have lots of credit card transactions. It works like this: you use your future sales to get an advance on future credit card or debit card sales. The amount of the advance is typically based on the gross amount of sales you expect to make over a set period.

How Does a Merchant Cash Advance Work?

A merchant cash advance is a simple way for small businesses to get the capital they need to grow. It’s like getting a loan — but rather than being tied to a firm repayment schedule, it’s repaid as you make sales.

The merchant cash advance providers give you a cash advance on future sales, and because you’re making future sales, there’s no need for collateral like there would be with other types of loans.

You also don’t have to give up any equity in your company to get paid back by the merchant cash advance provider; this makes them ideal for startups that don’t have any assets or who simply don’t want to dilute ownership, yet but are looking for funding to grow their business.

Pros of merchant cash advance

  1. Flexible and scalable. They offer an accessible alternative to a traditional business loan, which can be often difficult to obtain for small businesses. Unlike a traditional small business loan, a business cash advance is funded on a flexible basis and can be scaled up or down as required by your business funding needs.
  2. No collateral. Unlike traditional bank loans, there is no need for you to provide collateral for merchant cash advances – although there may be other security arrangements in place.
  3. Secured quickly. Once approved for a merchant cash advance, funds can be transferred into your business account within 24 hours, providing quick access to capital when needed most.
  4. Merchant cash advance repayments are taken at the source. Unlike some other forms of financing where repayments come out of your pocket each month, with merchant cash advances the payments to the merchant cash advance company are taken directly from the sales proceeds of your business.
  5. No hidden fees. With merchant cash advances there are no upfront fees or interest rates charged on top of the amount lent to you.

Cons of merchant cash advance

  1. High rates. The interest rate is often higher than the rates on lines of credit.
  2. Reduced cash flow. Payments are sent to the lender instead of going directly into your business bank account — so you won’t have access to the money until after you’ve made all of your regular monthly payments to creditors and other vendors.
  3. Fewer regulations. One of the biggest benefits of traditional loans or lines of credit is that they’re regulated by state and federal regulators who make sure that lenders aren’t charging exorbitant rates or engaging in other unethical or illegal practices.

Merchant cash advance rates and fees

Merchant cash advance rates and fees vary from one provider to another. Some of the factors that influence the rate you will be offered include:

  • Your business’ credit score affects your ability to secure financing and your interest rate.
  • How long you have been in business and how much profit you’re generating.
  • How many other businesses are using the same provider? If a provider has a large number of customers, they may be able to offer lower rates because they can spread out their costs across more people.

How can a merchant cash advance (MCA) be used for?

An MCA can be used for a wide variety of business purposes, including:

Business Expansion

Merchant cash advances are ideal for businesses that need to expand to remain competitive. They are also great for small businesses that have been in operation for some time but have yet to grow into large companies.

Marketing Spend

Marketing can be a costly endeavor, and it can be difficult to know where to allocate your finite resources. Business financing can help you to cover the cost of marketing campaigns, which can ultimately lead to increased sales and profits. By investing in marketing, you are sending a message to potential customers that you are serious about your business and that you are committed to its success. In today’s competitive marketplace, this can make all the difference.

Merchandise Purchases

Merchant cash advances can be used to purchase inventory or other merchandise from a business that accepts credit card payments. This is especially helpful if you need a large amount of inventory but do not have enough capital on hand to purchase it all at once.

So, which is better: a line of credit or a merchant cash advance?

The answer depends on your business, but we recommend taking your time to think about how each one would work for you.

Grow Your Business Now

If you’re a Canadian small business owner, Merchant Growth can help you get the financing you need to grow your company.

Our company is an alternative financier—which means we provide fast and flexible short-term funding to businesses. We offer competitive rates and flexible terms, so businesses don’t have to wait for approval or face the hassle of complicated paperwork.

If you want to learn more about what Merchant Growth has to offer, contact us today.

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