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Merchant Cash Advance vs Business Loan: What’s the difference?

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Choosing the right type of financing is important for businesses. The business lending industry in the UK is among the biggest industries nationwide. According to the latest figures, gross lending to UK businesses reached approximately £488 billion in 2023.

Hundreds of financial institutions offer multiple financing options for businesses and it can be hard to decide. We want to make this decision easier for you in this blog, so we’re discussing MCAs and traditional business loans to lay out the differences.

What is Merchant Cash Advance

Merchant Cash Advances (MCA) is an easy and quick way to finance your business without taking a traditional bank loan. MCA allows you to access funds against your future card sales. It is designed for businesses that accept card payments.

The amount of MCA depends on the volume of your monthly card transactions. Repayments are collected as a fixed percentage of each future sale until the advance is fully settled.

Overview of MCA

Let’s go over the key points of MCA and how it works.

  • You get funds against your future card sales in MCA.
  • A portion of your future card transactions goes to the lender until the advance is repaid fully.
  • You don’t necessarily need a good credit history to secure MCA. Businesses with bad credit can also get access to MCA funding.
  • There are higher fees for MCA than any traditional financing option.

Do you need a Merchant Cash Advance?

What is a Business Loan

Business loans are the most common type of financing. The term is self-explanatory, you borrow money from a financial institution (most commonly a bank, otherwise a third-party lender) to pay back later on agreed-upon terms. Business loans have a lot of different types, and the terms and conditions are different for each.

Let’s get into the details of different types of business loans and their specifications.

Types of Traditional Business Loans

Merchant Cash Advance vs Business Loan- Types of Business Loan

We will discuss 4 different types of business loans offered in the UK.

Secured loans

Secured loans in the UK require the borrower to offer an asset as a guarantee for repayment. This asset is a valuable item like your car, apartment, gold, etc., and serves as a security measure so that the borrower repays their loans.

By securing assets, banks or financial institutions reduce the risk of losing money. People pay back diligently when their assets are at stake. If someone fails to pay the loan on time, a bank can take possession of the collateral to make up for the loss.

Examples: Auto loans (secured against your vehicle).

Unsecured loans

Unsecured loans are the exact opposite of secured loans. In this case, a business can secure a loan without providing any asset as security for repayment.

Unsecured loans have higher interest rates as compared to secured loans because the lender cannot rely on collateral as a security. They take a major risk by offering loans without collateral so they make up for it by charging higher fees.

Examples: Personal loans, and student loans.

Short-term loans

Short-term loans are for businesses that need quick funding. They are also useful for managing temporary finances; they are approved easily without any hard credit checks. The payment span for short-term loans is usually 6-18 months.

Examples: Payday loans, and some business loans for the short-term.

Long-term loans

Long-term loans spread out over a longer period, ranging from 5 years to several decades. They are for well-established businesses that need big money to carry out business investments, long-term business projects, set up new locations, etc.

Long-term loans have well-managed repayment terms. The business repays the bank a small amount monthly. The procedure to apply for long-term loans is strict and only businesses with exceptional credit histories can secure them.

Examples: 30-year mortgages, or long-term business loans.

Merchant Funding Vs Traditional Bank Loan

Type of financing

MCA is not like a traditional loan; it is a cash advance provided based on future sales of a business. The lending agency assesses the borrower’s current credit/debit card sales to get an idea of the average business revenue. If it looks promising, they assume a minimum revenue generated from future card sales. In this way, the business gets a lump sum of money upfront, which they repay using a percentage of their daily credit card sales.

In the case of a traditional bank loan, a business borrows money and then repays it with interest on a scheduled basis.

Fixed term

There is no fixed term for repayment for MCA. The period for the contract varies with how much sales the business makes.

The payment terms for a bank loan are fixed. It can range from a few months to several years, depending on the type of loan and agreement.

Flexible repayments

The amount of money you pay at each repayment is highly flexible in the case of MCA. This means that in slower sales periods, you pay less, and in better times, you pay more.

When you take a business loan from a bank, you have to pay a fixed amount each month. Which means you pay the same amount regardless of how well the business is doing.

Security assets required

No collateral is required when you take MCA funding. Your card sales are the only major variable in this case.

A bank loan requires collateral or not, depending on the type of loan. For example, any asset like a vehicle or house is required as collateral if you take out long-term loans, but none is required for short-term loans.

Feature Merchant funding Business Loan
Type of Financing
Purchase of future sales
Loan of funds
Fixed Term
No
Yes
Flexible Repayments
Yes
No
Security Assets are required
No
Yes

Credit Check: Merchant Funding vs. Traditional Bank Loan

Merchant Cash Advance vs Business Loan - Credit Check

Hard credit check for a business loan

Traditional bank loans rely heavily on credit scores and collateral, so, they do hard credit checks. The strictness of the credit check can vary depending on what type of business loan you are applying for. For example, a credit check for a short-term loan will be less strict than if you go for a long-term loan.

Banks do hard credit checks to check for:

  • Your credit score
  • Payment history
  • Number of credit accounts
  • Current or any previous debts
  • Credit utilisation ratio (what portion of available credit you use)
  • Any recent credit checks
  • Previous requests for bank loan

Soft credit checks for MCA

Lenders or companies perform a soft credit check before providing merchant cash advance funding. This credit check analyses how your business deals with debts or financial situations. It will show various financial details, such as existing loans, your spending, mortgages, debts, or traditional bank loans associated with your bank account. Merchant financing focuses on the business’s sales history and potential future sales instead of its credit history.

This makes MCA an attractive option for businesses with solid sales that may not qualify for conventional loans due to strict credit requirements.

Which Option is More Expensive?

Merchant Cash Advance vs Business Loan - Which option is expensive

When comparing the costs of Merchant Cash Advances (MCA) and traditional bank loans, it’s important to consider each option carefully.

MCAs often come with higher fees due to their convenience and the speed with which businesses can access funds. These costs are calculated using a factor rate, which can add up more quickly than traditional interest rates.

On the flip side, traditional bank loans have different costs. For instance, short-term and unsecured loans carry higher interest rates because the lender takes on a greater risk of providing these loans without collateral.

However, for secured and long-term loans, the interest rates are lower. Although this might seem more economical, the payments are stretched over a longer period. This means the total interest paid can accumulate to match the seemingly high costs of other financing options. Moreover, the process of securing a bank loan can be burdensome because of the strict credit checks and the detailed application process.

Ultimately, making the right financial choice for your business boils down to understanding your business needs.

Explore Top MCA Options In The UK With ComparedBusiness

Choosing different financial options can seem overwhelming when you’re looking to secure funds quickly for your business. We recommend a Merchant Cash Advance (MCA) for its speed and flexibility. Here’s how you can go about it with ComparedBusiness:

  • First, take a good look at what your business needs. Do you accept card payments and are you looking for quick funding? If so, an MCA might just be the perfect fit.
  • Next, just submit your requirements in less than 2-mins and we will provide quotes from the top MCA providers in the UK.
  • Once you’ve got all the information, pick the best offer. Look for a provider who understands your business needs and offers flexible terms that work for you.
  • And finally, get the funding and start using it for your business. One of the great things about MCAs is the repayment process—it’s based on how well your business does daily or weekly, which can ease cash flow worries.

Written by:

Henry Baker
Henry Baker
Henry Baker, an adept financial & business copywriter in England, boasts a decade-long career collaborating with top-tier UK financial institutions. Renowned for his skill in translating intricate finance into captivating content, he's a trusted authority in simplifying complex concepts for diverse audiences.