If your small business has been operational for some time, you may be in a pinch for extra funds to finance upcoming expenditures. You might need the extra money for location expansion, renovation, equipment upgrades or for extra cash to pay off outstanding bills. Term loans and merchant cash advances (MCA) are two options you might consider. But which one is better for your business? Here are the five key differences between a term loan and cash advance to help you figure out which financing option is best for your business.
Qualifications – the difference between term loans or cash advances
There are several requirements for a term loan. When your borrower application is assessed by a lender like iCapital, we look at a business’ performance plus your credit as its owner. Commonly, the qualifications required for a term loan include:
- Sales: You must have annual gross sales of over $100,000.
- Operations: Your business has to be in operation for at least 12 months.
- Industry: No start-ups, construction, home businesses, online businesses, funeral homes, furniture or jewellery stores, and cheque-cashing businesses.
- Location: You must have a storefront or professional office space.
- Credit: No open bankruptcies.
By contrast, to qualify for a cash advance, we typically refer to a company’s credit card sales more so than other factors. This is because cash advances are approved based on annual credit card receipts. The cash advance is repaid using your company’s daily credit card receipts. However, your credit as a business owner, like a business loan, is also considered. The qualifications for a cash advance typically include:
- Sales: You must accept Visa, MasterCard and/or debit cards and have least $5,000 in sales monthly. No startups.
- Operations: Your business has to be in operation for at least six months.
- Industry: No home businesses.
- Location: You must have a storefront or professional office space and have at least 12 months remaining on your lease.
- Credit: No open bankruptcies.
The funding amount
A term loan for small businesses typically totals anywhere from $5,000 to $250,000, with a term ranging from three to 18 months. If approved, you’re likely to receive the funds within 48 hours or less via a direct deposit. If you have a long-standing need for funds, you can often apply for a second term loan once the first one has been paid off in full.
With a cash advance, you may qualify for up to one and a half times your monthly debit card and credit card sales volume to a maximum of $250,000 per location. Plus, you can request additional funding once the original balance has been paid down 75 to 80 per cent of the original balance.
If you've been granted a small-business loan, you’ll make consistent payments from month to month. Take pride in having peace of mind that your payments will remain the same with no surprises. This is because you were only lent one amount with a fixed interest rate. After you receive your funding, an agreed upon payment will be remitted from your bank account five days a week until you have paid in full.
On the contrary, a cash advance is paid based on a percent of your future credit card sales, not a fixed amount. Your repayments will vary each month. This can be helpful if you’re a business that is managing its cash flow. During a slow season, the collections made on the MCA will be lower. If sales are booming, collections will be higher. Regardless of your sales, the percentage that is collected remains the same, which will keep your business’ cash flow steady.
For a term loan with iCapital, there are no interest charges. Our rate is a flat fee added to the amount borrowed, which will be determined based on credit worthiness, length of time in business and other factors.
Regarding MCAs, there is no interest rate or payment due dates. A flat fee is simply added to the amount your business qualifies for. This fee is determined through several factors including: length of time in business, type of business, whether you own or rent your space and overall business performance.
Some similarities worth noting
The application process for both a term loan and a MCA often requires less than 10 days. This includes the entire process: from the time the application is received and processed to the time you receive the funds in your bank account.
When you bank with iCapital, you can track the funding payback a highly secure online portal powered by DC Bank, a schedule 1 Canadian chartered bank.
Bottom line? Both loans and MCAs can help to fund your operational needs, but each business’ situation is unique. If your business is prone to fluctuations due to inclement weather or seasons, a merchant cash advance would reduce the pressure of having to meet a payment when earnings have been low. Both, however, are good options for quick, easy business financing.