Comparing your funding options

March 1, 2021

Merchant Cash Advance vs Business Loans, SBA Loans and Payday Loans

Merchant Cash Advance 101

Probably the most popular questions we receive are (1) What is a Smart Advance and (2) How does it stack up to other funding solutions? Facing a common set of answers, we decided to condense our replies into a concise post to get past the most typical misunderstandings of how these lending solutions work, and how they compare to each other.

Let's start with the absolute basics. What is a Smart Advance? We discuss this briefly in our FAQs, but to make it even simpler - this is an alternative funding solution which provides businesses with a lump sum payment - based on future receivables via deposits, credit card sales and bank transfers.

How Merchant Cash Advances Work

Your business must be operational for at least 6 months and you must submit the most recent 3 months of bank statements to be eligible. A cash advance provider will use this data to evaluate your business history and determine how much of an advance you can receive, and what your payment plan will be.

Payday Loans

Typically confused or mislabeled as a merchant cash advance, the borrower gets a similar lump sum payment, which they agree to repay when they receive their next payday. The main distinction is that payday loans are aimed at personal lending, whereas a is only for businesses. Payday loans are famous for their high interest rates, and have become reined in by state regulations over time. Because of this, most payday loans max out at $100 to $1,000. A fine amount for personal use, but not nearly sufficient to pay the costs of doing business.

Business Loans

Short-term business loans are a popular form of lending used to finance businesses and generate working capital. While business loans can offer competitive interest rates, they are also tied to a far stricter screening/application process. Credit score and borrower's history are given much more scrutiny and often pose grounds for denial of funds. The borrower may also be subject to providing collateral or making a downpayment.

Ais far more accessible from this perspective. You don't need a great credit score and it doesn't matter if you're already in debt. There's also no down payments or collateral required. If your business has a proven record of generating income, there is usually a provider willing to give you access to funds for an agreed upon purchase amount.

SBA Loans

Characterized by high payouts, low interest rates and longterm payment plans, a Small Business Administration Loan is a popular option for raising capital. Given the larger scope of these loans, they are typically used for real estate, equipment purchases or even buying a business. Down payments and collateral are usually required, as is a credit score of 680+. Sometimes loan terms can span into decades.

This is what truly separates a SBA Loan from a Merchant Cash Advance, which is typically a short term advance of funds repaid in less than a year. The clear advantage of SBAs are their lower interest rates, but that benefit comes with the condition of meeting a number of requirements.


So which solution is right for your business?

There is no shortage of debate over which is the best deal. But like anything in business and real life, the only true answer is: "it depends".

If you're building a startup, buying real estate and /or happen to have good credit and collateral - then a Bank, SBA Loan, or Line Of Credit may be a good choice for you and your business.

If you need funds to make upgrades to your home or personal lifestyle, but can’t wait until your next pay cycle - then a Payday Loan may be a suitable option for you.

If you run a business and are looking to expand or may even be temporarily struggling  or if you need immediate access to funding without the strict requirements of a Business Loan or Line Of Credit - a Smart Advance may be an ideal choice for your business.

Evaluate your needs, assess your options and proceed accordingly.

Subscribe to our mailing list for the latest in small business news
By subscribing you agree to our Privacy Policy.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
© 2023 The Smarter Merchant. All rights reserved.