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Traditional business lenders are notorious for discriminating against certain industries for different reasons. Applicants for small business loans are frequently rejected solely because of the unique challenges of their industries. These challenges have led to otherwise thriving industries being unfairly stereotyped as “risky” or “low-growth.” One example is retail, which presents a host of different financial curve balls. This makes the idea of applying for additional business funding very stressful. The applicant doesn’t always know which type of small business loan is the most sensible solution to the problem at hand.

Two of the more prevalent options are a business line of credit and merchant cash advance. Both can be extremely helpful but they are very different, so it’s important to know which problems they are more inclined to solve.

Requirements For Both Options

The first stage of the application process is figuring out whether or not you are eligible for the business funding program you have in mind. When it comes to business line of credit and merchant cash advance, credit score might be the deciding factor. The latter option is typically accessible for applicants with poor or little credit history, whereas the former may only be in the cards if you have good/excellent credit. Especially if your bad credit is attributed to maxing out or nearly maxing out multiple credit cards to cover regular expenses. A business line of credit also requires you to demonstrate strong cash flow. You may be approved for a merchant cash advance, on the other hand, during your industry’s slow season or when an inevitable rough patch lies ahead.

Basic Terms Defined

With a business line of credit, you are given a limited amount of money that you can borrow from whenever you want. When you do borrow, you have to make a monthly payment. It’s best to pay back as much as you can as quickly as possible, because the longer you take to pay off your balance, the more interest incurs. Interest rates for a business line of credit, however, are usually lower than merchant cash advance. And when you make payments, more money becomes available for you to borrow. So, if you were to pay off your entire balance, you would likely gain access to the original borrowing amount again.

A merchant cash advance provides a lump sum based on your projected credit and debit card sales. Payments are made in the form of a percentage of your transactions. They are collected on a daily basis or whenever you batch out your credit cards sales. When sales are slow, your payments are negligible. And less payments does not mean more interest. In fact, the more spread-out your payments are, the lower your interest will be. But in order to be approved for a merchant cash advance, your business must perform substantial credit or debit card sales on a regular basis. At least enough to balance out revenue and cash for the year.

Which Problem Most Closely Resembles Yours?

If you are eligible for both options, your decision will most likely come down to whether your investment is short-term (business line of credit) or long-term (merchant cash advance). An example of a short-term investment is having to order extra inventory while a certain item is selling like wildfire. Another might be having to make payroll for ten employees about two weeks before your accounts receivables are scheduled to come in. What do these two scenarios have in common? They only require a modest amount of funding, and the funding is needed for a “short” time frame. So, while you could theoretically use a business line of credit to cover expenses during a slow period or as you hire more people, that slow period must be on the short side, and the expenses must be the same every month. Your new hire would ideally begin contributing to your revenue stream right away.

It’s much easier to justify a merchant cash advance when your investment is more substantial and/or stretched out for a “long” time frame. Even if what you are actually purchasing isn’t too different from what you would purchase with a business line of credit. Instead of buying extra inventory of one or a few items, a merchant cash advance is better for buying a whole seasons’ worth of items. And since, unlike a business line of credit, a merchant cash advance can be accessed during rough patches, you could take advantage of off-season discounts and make other investments (new hires, marketing campaigns) well before the busy season starts. Since you are borrowing more money, your investment should be projected to increase revenue or improve cash flow over the course of several months.

Know Your Business Above All Else

Virtually all retailers experience slow periods or require extra funding to capitalize on an immediate opportunity. Choosing between a business line of credit or merchant cash advance simply means determining the “size” of the situations you are prone to. Businesses that are often subjected to extreme seasonality and ebbs and flow in cash flow are perfect candidates for merchant cash advance. Those that are more susceptible to the occasional “hiccup” are more ideal for a business line of credit. If you choose to work with a company like United Capital Source, you might find out that terms for one business funding program can be customized to slightly resemble another. The world of small business loans can be confusing but as long as you know your business’s finances inside and out, it shouldn’t difficult for your business lender to come up with an arrangement that suits every one of your needs.

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