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A business line of credit vs. merchant cash advance? This is a question that most businesses will encounter while they are looking for fast access to working capital.
And while there are a variety of options for financing—from long-term and short-term loans to invoice financing—when you need quick access to cash there are two popular options you might want to consider: a business line of credit vs. merchant cash advance (commonly referred to as an MCA).
Both a line of credit vs. merchant cash advance have their pros and cons, but one may be better for your business depending on your circumstances.
Fortunately, we’ve broken them down so you can decide what will work best for your business. Here’s everything you need to know about a business line of credit vs. merchant cash advance.
The first thing we should do in the business line of credit vs. merchant cash advance debate is define each type of business financing.
A business line of credit is flexible “revolving” capital that works almost like a credit card, except you get access to cash and, in some cases, lower APRs.
It’s a flexible financing product that lets you withdraw funds up to a predetermined amount—this means you can withdraw funds as you need it, as opposed to receiving the full sum of the loan at once, unlike a term loan.
A business line of credit is typically used for short-term working capital needs, such as inventory purchases, future project costs, or company payroll.
Banks can be a good place to look for lines of credit, but a number of online lenders offer quicker, easier application processes or requirements.
Banks have high minimum qualifications and often require specific collateral, while online providers can be far more flexible.
You’ll typically need to have been in business for at least six months and have at least $50k in annual revenue to qualify. Generally, there’s no minimum credit score, but lower credit scores will result in higher interest rates, of course.
Credit lines can range from $10,000 to as high as $1 million, depending on your business needs and qualifications. Terms are usually annual with an interest rate based on the prime rate, plus 1% to 3%.
Interest rates vary as the market changes, of course, but many lenders let you withdraw funds—via paper check, online, check card, or other methods—for no fee or very small fees.
However, you can expect to pay a modest fee to open the account once you’ve been approved. For example, you might be charged $150 for credit lines under $25,000 and $250 for larger credit lines. An annual fee is often waived for the first year, and may run $100-$150 annually thereafter. Payments are interest-only on the amount you borrow.
Apply for a Business Line of Credit
A merchant cash advance is a lump sum of capital you repay using a portion of your daily credit card transactions. Merchant cash advance is a quick, easy way to get a business cash advance with no need for collateral—even if you don’t have a great credit score.
Merchant cash advances are often provided through alternative financing companies.
This means they are very quick to procure and have more lenient qualification requirements. Since you’re paying back through your business’s credit card transactions, MCAs often don’t require collateral to secure financing.
You’ll need to have been in business for at least five months, with a 400+ credit score and at least $75K in annual revenue.
The maximum advance amount you can receive is between $2,500 and $250,000. To determine exactly how much your business pays back, the MCA provider will assign a “factor rate” to the advance you receive. The amount of the advance is multiplied by this factor rate to determine the total amount that must be paid back. Factor rates can range from 1.14–1.44.
The other important number to consider is the “withholding” amount, which is the percentage of your credit card sales that the MCA provider will keep until the full amount has been repaid. Withholding amounts average around 15%, but can be as low as 5% and as high as 40%. Most advances are paid back in full in six to nine months.
Apply for a Merchant Cash Advance
What they’re both good for:
Now that you understand what this financing options are, how do you choose?
Of course, your qualifications will determine your ability to securing financing, and sometimes the best financing is whatever you can get, depending on your situation.
But if you’re deciding between the two, these are some guiding factors you may want to consider.
When you should use a business line of credit:
When you should use a merchant cash advance:
As you can see, there are many pros and cons of a business line of credit vs. merchant cash advance. But now that you know what those are, you can make a more informed decision for you business when it needs quick, short-term financing.
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