When it comes to business financing, having access to working capital is essential for managing cash flow, covering unexpected expenses, and fueling growth. Two popular options for short-term financing are merchant cash advances (MCA) and business lines of credit.
Both financing options provide businesses with flexibility, but they work differently and suit varying needs. In this guide, we’ll break down how each financing option works, their pros and cons, and how to decide which is right for your business.
What is a Merchant Cash Advance?
A merchant cash advance is an alternative financing option that provides a lump sum payment upfront in exchange for a percentage of future credit card sales. It’s not a traditional loan but rather an advance on your revenue.
How it works:
- You receive a lump sum payment.
- Repayment is made as a percentage of daily credit card sales or through fixed withdrawals from your business bank account.
Pros of Merchant Cash Advance:
- Quick approval process.
- No need for perfect credit; approval is based on sales volume.
- Payments adjust with sales fluctuations, making it flexible during slower periods.
Cons of Merchant Cash Advance:
- Higher fees compared to traditional loans or lines of credit.
- Can strain cash flow during high repayment periods.
- Lack of transparency in some fee structures (factor rates vs. interest rates).
What is a Line of Credit?
A business line of credit offers access to a set amount of funds that you can draw from as needed. Interest is charged only on the amount used, and once repaid, the funds become available again.
How it works:
- You’re approved for a maximum credit limit.
- Draw funds as needed and repay based on agreed terms.
Pros of Line Of Credit:
- Flexibility to use funds for various needs.
- Lower interest rates than MCAs or credit cards.
- Only pay interest on the amount borrowed.
Cons of Line Of Credit:
- Requires a good credit score and solid financials.
- Can take longer to get approved compared to an MCA.
- May include maintenance fees or draw fees.
Merchant Cash Advance vs Line of Credit
| Aspect | Merchant Cash Advance | Line of Credit |
| Eligibility | Based on sales volume; less dependent on credit score. | Credit score and financial history are critical. |
| Repayment Terms | Daily/weekly based on sales or fixed amounts. | Flexible; monthly payments based on amount used. |
| Fees and Rates | Higher fees; factor rates (e.g., 1.2x the borrowed amount). | Lower interest rates; transparent terms. |
| Impact on Cash Flow | Variable, tied to sales performance. | Predictable payments, easier to manage. |
Scenarios to Help You Choose the Right Option
Choose a Merchant Cash Advance if:
- Your business has high daily credit card sales.
- You need cash immediately and don’t qualify for traditional loans.
- You prefer payments that fluctuate with revenue.
Choose a Line of Credit if:
- You need ongoing access to funds for various expenses.
- Your business has a solid credit history and financials.
- You want predictable repayment terms with lower interest rates.
Conclusion: Choosing the Best Option Based on Business Needs
Both merchant cash advances and lines of credit have their place in business financing. The right choice depends on your business’s financial health, cash flow patterns, and immediate needs. If you’re looking for quick funding with flexible repayments, an MCA might be ideal. For businesses with strong credit seeking a cost-effective, flexible financing solution, a line of credit is the way to go.
At Accountable Capital, we specialize in helping businesses find the right financing solution. Contact us today to explore your options and secure the funding you need to grow your business.
