MCA vs. Business Loan: Which Is Better For Your Business?

MCA vs. Business Loan: Which Is Better For Your Business?

When it comes to business funding, there are several options. Two of which are merchant cash advances- or MCA- and business loans. There are several differences between the two and the one that’s best for your business depends on your needs. In this article, we’ll explore how they are different and how to figure out which is best for your business.

MCA is an Advance, Not a Loan

First, it’s important to note that a merchant cash advance is not a loan. The money is advanced to you based on the money they expect you to earn in the future. This is known as your “future receivables”. As your revenue comes in, you will pay a percentage to the funder until the advance has been paid off.

How is an MCA different than a Business Loan?

There are several differences between these two funding options. The two most obvious are:

Repayment amounts
Repayment terms

A business loan has a fixed repayment schedule with no fluctuations. On the other hand, the MCA payment schedule may vary due to revenue fluctuations, as payment amounts are based on revenue.

When you sign the MCA contract, it will define the payment amount based on the funder’s estimate of your projected revenue. Since payment is a percentage of your receipts, it may fluctuate due to an increase/decrease in revenue. If payment amounts increase, the term shortens. If payment amounts decrease, the term gets longer. If you do experience a decrease in revenue, you need to speak with your funder to make payment adjustments.

Do MCAs Have Interest?

MCAs do come with a cost, but it’s not in the form of interest. When the funder makes the offer, they will stipulate the future revenue they are purchasing. They will then add a factor rate, which is the ratio of your receivables to the amount they advance you. For example, if the funder advances you $100 in exchange for $120 of future revenue, you have a 1:2 factor rate.

What if Revenue Declines?

No business owner wants to be in a situation where they are unable to meet their financial obligations. Unfortunately, it’s not always something you can avoid. You may find that business slows down at some point and you’re not earning the revenue that you once were. If this is the case, work with your funder to re-align your payments.

Is it Difficult to Get an MCA?

MCAs were created to make it easy for small businesses to get the cash they need to keep their business running. Compared to a business loan, an MCA is much easier to obtain. Here’s why:

Traditional loans require a track record of 2-3 years of profitability. However, MCAs focus on your expected future revenue.
Traditional loans use your personal FICO score. However, MCAs are primarily concerned with your business cash flow- though they may require a minimum FICO score.
Traditional loans take time because of the lengthy list of documents that are required. MCAs can be processed quickly, as they only review financial information that relates to your ability to repay.

Which is better?

The decision regarding which one is better for you and your business depends on your situation. A business loan is less costly- but an MCA is easier to obtain. You must determine which one would fit your situation. Plus, make sure you have a plan for how you will use and repay the funds.

If you need help with funding your small business needs, contact Toluca Lake Capital. We can help you determine which is best for you and help you get it.