What’s the Difference between a Business Line of Credit and a Merchant Cash Advance?

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What’s the Difference between a Business Line of Credit and a Merchant Cash Advance?

A business line of credit will give you access to short-term funding similar to a credit card. For example, a merchant cash advance is structured as a lump sum payment for a portion of future debit or credit card sales. Both loans are alternatives to traditional bank lending and offer a way to get cash flow quickly.

Lines of credit loans are often sought after by fairly new small businesses, businesses whose credit rating is lacking, or even businesses who want an emergency fund. Lines of credit loans are easier to qualify for than traditional bank loans, but interest rates, fees, and payments are often higher than traditional rates and payments.

A Business Line of Credit

Business owners open lines of credit to gain access to short-term or emergency funding. This funding is generally used to support operating expenses, including payroll, supplies, or inventory. Seasonal or cyclical small businesses rely on unsecured lines of credit as a source of off-season working capital. A line of credit is almost like a credit card, and you can use it whenever you need it. The only rule is, don’t exceed the set credit limit. Then, you can withdraw cash to cover the expenses you need to pay at the moment.

If you are looking for a loan for a specific purpose, a business line of credit may not be a good idea. Lines of credit are not designed for something specific but tools to help business owners better manage cash flow. You can draw funds from a line of credit by using a small business credit card, mobile banking, apps, direct communication, or a business checking account.

A business line of credit is established by taking your total projected annual growth revenue and dividing it by 365 (days of the year). Next, multiply your daily cash needs by the usage, and you have an approximate line of credit for your business. The beauty of a business line of credit interests is charged only for the amount of money you use.

It is somewhat difficult to have an unsecured LOC approved. You need to be a well-established business or have a personal excellent credit history. Also, if you have a relationship with your local banker or credit union, that would be good.

Keep your credit use below 30 percent. This is a good rule to follow. TIn other words, if you have $100,000 in available credit, don’t let your balances go over $30,000.

A line of credit is good to have available, but if you don’t use it or use just a small portion of the total amount, it will lower your credit use rate and improve your credit scores. In addition, keeping a line of credit in good standing will help build your business credit rating and position yours for a better loan from traditional sources. Small business owners that first-time applicants should begin with a small line of credit and pay it off quickly to build a good credit profile.

Maintaining small business finances running smoothly is a challenge to today’s pandemic and fast-paced world. Small business owners suggest a small business line of credit could be a simple solution if you need to meet goals quickly. Make sure that you borrow, however, at a pace that is right for you.

Merchant Cash Advance

A merchant cash advance is not a loan, but a cash advance based on your credit and debit card sales and deposited in your business’ merchant account. A business owner can apply for a merchant cash advance and have funds placed into a business check account within 24 hours after approval.

A merchant cash advance is a bit different than a line of credit. Your merchant line of credit rates are higher than other loaning options, so do understand the terms and read the fine print.
Also, a merchant credit account utilizes holdbacks. Holdback amounts are the percentage of daily credit card sales applied to your advance. The holdback percentage is between 10 and 20 percent and is fixed until you completely repay the balance.

Since the repayment is based on a percentage of your daily balances, the credit card transactions repay the loan. Therefore, if transactions are low on one day, the draw from the merchant account will be less. In other words, the payback is relative to incoming credit card sales.

MCA lenders charge a factor rate or the distinction between the interest rate a business owner is charged for the advance and the holdback amount. Factor rates can range between double and triple digits.

A merchant cash advance makes sense for a small business that needs cash quickly to take advantage of a short-term opportunity, meet payroll, or purchase inventory. Make sure. However, the costs of your merchant cash advance are financially secure for your business. Qualifying criteria are less stringent than most small business loans, but an MCA comes with a higher cost. Still, there are business owners who use a merchant cash advance option to gain capital quickly.

A merchant cash advance is good for many small business owners. They find the short-term loan is an alternative to expensive long-term loans. In addition, if you have a strong credit profile, you may be able to leverage your merchant cash advance to meet your short-term needs and gain additional cash flow.

Merchant cash advances can have termed as short as a few months or terms up to a year or more. Depending on the nature of the loan, your periodic payments can be daily or weekly, or you may be able to spread the burden of debt throughout the month. If you pay your merchant cash advance regularly and on time, you will gain a good credit history, and your business can be strengthened.

A business line of credit and a merchant cash advance are alternative loans for businesses when emergencies or additional business funding is needed. However, they are somewhat higher interest than the traditional business loan, and they can be difficult to manage. The point is to make sure you handle all loans and credit lines responsibly.