Merchant cash advance vs. bank loans: Pros and cons

Editorial Team

3 min read
Two people reviewing paperwork

Picture this: Business is going well — and because you have a merchant account, the credit card sales keep rising month after month. You’re growing, but you need financing to invest in your business and continue to scale.

Especially if your business is relatively young, getting merchant funding to achieve business goals can be difficult. Merchant cash advances and merchant loans can help keep your business growing. But what’s the difference between a merchant cash advance and a bank loan? And which is right for you?

There are pros and cons to merchant cash advances and bank loans. The best option really depends on your business, industry, and financial history. Here are a few of the pros and cons of each:

1. Speed & qualifications

When you request a merchant cash advance, you’ll typically be asked to provide bank statements and your merchant account history (i.e., most recent processing statements). Providers will use past performance to determine your ability to cover the cash advance. Many successful companies qualify and get the money quickly.

Bank lenders will ask for the above documents as well, but they also need to see credit ratings, collateral, tax records, and more documentation.1 The review process can take weeks or months. And even a successful business may be denied if its credit history is less than perfect.

2. Interest rates and repayment terms

Merchant cash advances are not loans. You’re not borrowing money — you’re selling a portion of future sales. Because of this, there are many ways for merchant cash advance repayments to be structured:

  • Having a percentage of your daily credit and debit card sales withheld
  • Remitting fixed daily or weekly ACH debits from your bank account

With bank loans, however, there are strict laws that limit how much lenders can charge.2 Bank loans are harder to secure, but they can be more affordable in the long term, depending on interest rates, loan term, repayment schedule, and other factors.

Bank loans typically have set monthly payments. Regardless of how well business is going, you’re required to send $200, $500, or whatever the agreed-upon amount is each month until the debt is paid in full. By contrast, merchant cash advances are usually tied to future revenue. Whether business is good or bad, you’re only obligated to share a certain percentage of credit or debit card processing sales.

3. Financing availability

Following the financial crisis of 2008, many credit-worthy borrowers were unable to access traditional financing because banks weren’t lending. Commercial bank loans to small businesses declined by $40 billion from the second quarter of 2008 through the second quarter of 2010.3 Merchant cash advances provided an alternative funding option for many businesses during this time.

Is a merchant cash advance or a bank loan better for your business?

Choosing the right financing approach involves knowing your business goals, understanding your revenue and cash flow, and weighing your risk tolerance. If you want to learn more about merchant cash advances, contact us to schedule a free consultation.

The external hyperlinks were provided for informational purposes only. Please contact each company directly to obtain additional information, as Clover does not assume any responsibility or liability for any information and communications shown here and on any third party web links.

1 “Business Loan Requirements Overview,” Fundera, 12 February 2020
2 “Usury laws: What they are and why you should care,” Credit Karma, 6 August 2019
3 “10 Years After the Financial Crisis: The Impact on Small Business,” Investopedia, 13 September 2018

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