Merchant Cash Advance vs Business Credit Card (Which is Best?)

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If you’re seeking financing to operate your business, a merchant cash advance or a business credit card are two options you may consider. While each has its own pros and cons, it’s important to closely examine the two to find out which is better for your unique circumstances. In this guide, we’ll compare a merchant cash advance vs a credit card to help guide your decision on which is best for your business.

Differences Between a Merchant Cash Advance & Business Credit Card

With only 42% of small businesses having their financing needs met – there are tons of options to help small business owners grow their business but two popular alternative financing choices include merchant cash advances and business credit cards. Here’s how they compare.

Benefits of a Merchant Cash Advance

Securing a merchant cash advance, or MCA can be an excellent option for businesses that need flexibility with their financing. Because they use your business’s card sales as a form of collateral for the financing, it doesn’t require additional collateral and comes with more lenient requirements. This allows businesses that may not otherwise qualify for financing to get approved.

Additionally, a merchant cash advance can be perfect for businesses with less-than-perfect credit. In most cases, businesses that have at least one year of history with stable, strong card sales can qualify for a merchant cash advance despite a flawed credit score.

With a merchant cash advance, you also get the flexibility to use your financing however you desire. Whether you need funding to make payroll, bridge accounts receivable gaps, or purchase inventory to prepare for upcoming seasonality – you can do it all with a merchant cash advance.

As for the amount of your financing, an MCA is often limited to the amount of your business’s card sales. For example, if your business has monthly card sales of $100,000 – you can often get approved for up to $120,000 in financing. 

Lastly, an MCA can offer unique cash flow advantages because your payment is based on your business’s card sales rather than a fixed amount. This can help to prevent your business from becoming “underwater” on your financing by avoiding fixed monthly payments.

Benefits of a Business Credit Card

Another popular form of business financing is a business credit card. Similar to a merchant cash advance, it can offer more flexible requirements than other types of financing like a traditional loan. 

One of the largest benefits of a business credit card is the streamlined application and approval process. Because the card issuer will take into account your credit score and doesn’t rely on your business’s history as much, the process can take minutes to be approved. In most cases, you can have your card delivered to your address within the week and some issuers even allow for digital access so you can start using your new card immediately.

In addition to the simple application process, credit cards can also be a more affordable financing option depending on how you use the card. If you pay your balance in full each month, your costs can be limited solely to the fees that your card imposes and nothing else. In some instances, this might mean your financing costs could be completely free of charge.

A small benefit that can sometimes get overlooked is the ability to earn rewards. While it may not seem like much, some cards can earn as much as 5% in cash back on purchases – which can become substantial over time.

If you’re a new business that’s working to improve your credit, opening a credit card can be one way to boost your credit rating over time. However, in the same manner, if you’re unable to make payments, this can also harm your credit.

Finally, a credit card comes with straightforward costs that are clearly exhibited in your card agreement documents. Because of the regulations involved with credit cards, your card will have a clear interest rate attached to any purchases or balance transfers you make. All fees and additional charges will also be presented in your card agreement, making it simple and easy to understand the cost of your financing.

What is a Merchant Cash Advance

A merchant cash advance is a type of financing that uses your business’s history and card sales as a form of collateral to back your financing. Instead of relying on credit scores, assets, and personal guarantees – an MCA can offer financing to businesses with imperfect credit and without additional collateral to secure their financing.

Instead, your business will need to have a strong history of debit and credit card sales in order to qualify.

Because MCAs are not regulated in the same fashion as loans and credit cards, they work differently. An MCA does not have an interest rate associated with your financing. Instead, a factor rate is applied to the amount of your financing that can help you to determine the cost. For example, if your business is seeking $100,000 in financing, you might secure financing with anywhere between a 1.2x and 1.4x factor rate. This means your total repayment amount would equate to $120,000 to $140,000 on the total amount. There’s also no defined payback period. Because your payments are dependent on your credit and debit card sales, the length of your financing is undefined.

A Merchant Cash Advance is Best for Your Business When:

  • Your business has a stable history of card sales with at least one year of history.
  • You need a large amount of financing to fund a business expansion or manage accounts receivable gaps.
  • Your business has imperfect credit and cannot get approved for other forms of financing.
  • You do not wish to supply additional collateral or a personal guarantee to back your financing. 

What is a Business Credit Card?

A business credit card is a simple way to access credit and secure financing for typical operating expenses. These can be a great option for both startup businesses and mature businesses looking to build their credit and keep their personal and business expenses separate. Instead of receiving a large lump sum of financing, you will receive a revolving line of credit that can increase or decrease depending on your usage and payments made.

Just like with a personal credit card, a business credit card will have a varying interest rate that is applied to your balance at the end of the statement period. In addition, some issuers may charge additional fees including an annual fee, late payment fees, and other fees that should be examined when weighing different cards. 

There are two main types of business credit cards – secured and unsecured. Secured credit cards have additional collateral (or a security deposit) backing your financing that helps you to get approved and attain a lower interest rate. Unsecured credit cards do not require additional collateral but often come with higher interest rates and more stringent credit requirements. In general unsecured credit cards are more popular for many business owners because they don’t require a security deposit and often have higher spending limits.

It’s worth noting that not all expenses can be covered by a business credit card. For example, if you’re seeking financing to pay rent, some landlords may not accept credit cards and therefore a credit card may not be the best solution. Some credit cards may offer a cash advance feature enabling you to get cash from your card, however, the costs of these services can be exorbitant so it’s critical to weigh the costs.

A Credit Card is Best for Your Business When:

  • Your business has a reasonable credit score with at least six months of history.
  • Your business lacks significant card sales to qualify for an MCA.
  • You seek straightforward costs that are clearly outlined.
  • You need a small amount of financing for operating expenses.
  • Credit cards are accepted for the expenses you plan to use your financing for.

Which Type of Financing is Best for Your Business?

Both a merchant cash advance and a business credit card can be viable options to get the financing you need to grow your business. Both offer some pros and cons that you should weigh before deciding which type of funding is right for your business.

In most cases, for businesses that lack significant revenue, a business credit card is going to be the better option because of the straightforward application process that doesn’t require significant revenue to get approved.

If your small business has a history of stable card sales and you require a significant amount of financing, a merchant cash advance can be a great option. This is especially beneficial for businesses that cannot supply additional collateral or they lack the credit history to get approved for a credit card.

Additionally, you’ll want to consider that not all MCAs are equal. For example, Specialty Capital offers a variety of products that make your financing more affordable. With our unique MCA product, you can secure industry-leading prepayment discounts that are perfect for bridging accounts receivable gaps. Further, we offer a multi-draw advance product that acts very similar to a business credit card and allows you to draw from 

When it comes to finding the right financing for your business, it will ultimately come down to your business’s unique circumstances and history. If you’re unsure about which financing type is best for your business, get in touch with Specialty Capital today to examine your options and find the best solution to your funding needs.

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