Alternative business financing companies offer various types of business funding programs to suit the needs of various types of businesses. Each option presents different advantages and disadvantages. But having so many options to choose from can be confusing. And some of them seem very similar at first, making it difficult to decide which one is right for you. Thankfully, companies like United Capital Source are well-aware of how stressful the business lending world is to begin with. We expect aspiring borrowers to have questions, and are therefore happy to explain the details of every viable option.
People who were curious about a merchant cash advance might have been thrown off by the debut of revenue based business loans. These two working capital loans are very similar but very different, especially when it comes to functionality.
1. Accessibility For Both Options
Revenue-based business loans and merchant cash advance are both accessible for borrowers with poor or little credit history. They can both be approved and distributed in just a few business days. What sets them apart in terms of eligibility is revenue, cash flow, and credit/debit card sales. Consistently steady revenue and tight cash flow are not mandatory requirements for a merchant cash advance. It is fully accessible for businesses prone to occasional or cyclical dips in revenue, as well as businesses that frequently experience extreme ebbs and flows with cash flow. Merchant cash advances are often approved for seasonal businesses that are currently in their slow season, when sales are down.
The primary requirement for a merchant cash advance is a significant amount of revenue generated from debit and credit card transactions. You must be able to prove a strong recent history of average monthly transactions, with at least 40-50% of monthly revenue coming from debit and credit card sales. Potential borrowers should focus on the average dollar amount of debit and credit card revenue, as opposed to the number of transactions.
2. Different Requirements
Eligibility for a revenue-based business loan, on the other hand, is based on monthly revenue. Rather than having to prove a certain amount of revenue from debit and credit card sales, potential borrowers must prove a certain amount of monthly revenue in general from the past three months or so. They must also submit hard data to show how much their monthly revenue is projected to increase should they be approved.
The more monthly revenue you take in, the higher your funding amount will be. In fact, your funding amount will likely be a multiple of your monthly revenue. With a merchant cash advance, your funding amount is based on your recent and projected monthly revenue from debit and credit card transactions.
3. Terms And Fees
Payments for a merchant cash advance are automatically deducted as a fixed percentage of daily debit and credit card sales. You may also be able to make payments on a weekly, bi-weekly or monthly basis. Instead of a traditional interest rate, the business lender’s fee comes from two percentages: the “factor” rate and the “retrieval” rate. The former rate tells you the total amount you owe, while the latter tells you how much is deducted from your daily debit and credit card transactions.
With a revenue based business loan, payments are deducted as a fixed percentage of your total monthly revenue. So, like a merchant cash advance, you will most likely be making daily payments. This percentage is based on a “capture” rate that is usually below 10%. This suggests that a revenue based business loan will most likely be cheaper than a merchant cash advance, which isn’t really a surprise because the former is harder to qualify for.
One thing the two options have in common is that the amount you pay each day depends on how much revenue you earn.
4. Functionality And Suggested Uses
Merchant cash advances and revenue based business loans can be used for a wide range of purposes. Our clients have previously used them for short-term investments, long-term investments, or simply to cover regular business expenses during a rough patch. They might have needed to replace equipment, order inventory in bulk, or launch a marketing campaign.
Both are versatile and used for initiatives that have a high likelihood of increasing revenue. Examples include hiring more salespeople or developing a new product. In these cases, the potential borrower would be able to give the business lender a fairly specific figure in terms of projected revenue. Hiring a certain amount of salespeople, for example, will multiply sales by a certain amount.
Still Not Sure?
If you still aren’t sure which option is right for you, rest assured there are technical factors about your business or desired investment that will seal the deal. We guarantee all of our clients that the business loan we select for them is undoubtedly the best choice for their individual situation. A client would never be recommended a business loan without this level of certainty. After all, we wouldn’t expect you to pay off debt without trouble if you weren’t 100% sure you were given the funding amount and terms that are most beneficial for your financial health.