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Cash Advance or Loan?

Our specialty is tailoring finance strategies to the needs of our clients. There are two basic means by which business owners can obtain immediate access to working capital without having to post collateral: a merchant cash advance or a "bank only" loan.

A merchant cash advance is not a loan. It is a sales contract whereby the funding source agrees to purchase a future volume of the business' sales at a discounted amount. There are no upfront fees or costs charged by the lender. Repayment is debited directly from the business' checking or merchant processing account in small daily amounts until the purchased sum has been repaid. The amount of those payments can be based on either an agreed upon percentage of the business' sales or a fixed daily amount - whatever best suits the circumstances of the particular transaction. Either way, large, burdensome monthly payments are eliminated. It is important to keep in mind that since merchant cash advances are not loans, they are not reported to the credit agencies and cannot violate any covenants regarding loan to asset ratios that the borrowing business may have with its banks. Every transaction is different, of course, but most merchant cash advances are designed to be repaid within 6-15 months. However, regardless of how long it takes to complete repayment, the borrowing business is not liable to pay any more than the agreed upon purchase amount. All risks regarding repayment are assumed by the lender.

A "bank only" loan is exactly what its name implies. It is a true loan in all legal respects. The interest payments are fully deductible and the amount of the loan and repayment status are generally reported to the credit bureaus. Bank only loans usually allow the borrowing business to obtain greater amounts at lower rates and for longer terms than merchant cash advances. However, the underwriting standards are often more stringent and, like all bank loans, a small loan origination fee is typically charged. Repayment is structured similarly to a merchant cash advance with small daily debits taken from the business checking or processing account until the loan is repaid- thus elimnating large monthly payments. With advance notice, some lenders will allow the borrower to stop the repayment debits for a short while without penalty, provided the missed payments are made up at a later date.

There are numerous considerations when determining the best method of obtaining working capital for your business. If you need assistance in deciding which approach is best suited to your particular situation, we’re here to help.

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