Short Term Business Loan vs. Merchant Cash Advance: What’s the Best Option for Your Startup?

With so many types of loans in the markets, knowing which one would work for your business might be a challenging process. This becomes more confusing when you are looking for some urgent funding. There are two most common funding solutions that most businesses consider when it comes to raising fast capital –short term business loans and merchant cash advances. Both types of funding have its own pros and cons. But how do you decide which one fits your needs best? In this article, we will take you through each small business financing option and explain when a short term business loan might be a better option for your business.

What is a Short Term Business Loan?

Belonging to the family of traditional loans, a short term business loan offers fast business capital with set repayment terms, usually lasting between three months to 18 months. These loans are generally used to cover immediate business needs, such as buying inventory, handling payroll, or filling a temporary cash flow gap.

The appeal of short-term business financing lies in its structured nature. You’ll make regular payments—often monthly, but sometimes weekly—until the loan is repaid. Interest rates are typically lower than those associated with other types of fast business loans, making them an affordable option for businesses that can handle consistent payments.

Benefits of a Short Term Business Loan:

·      Lower Interest Rates: Compared to merchant cash advances, short term loans often come with more favorable interest rates, especially for businesses with good credit.

·      Fixed Payment Schedule: Having a predictable payment schedule makes it easier to manage cash flow and plan future expenses.

·      Access to Larger Loan Amounts: Depending on your credit score and business revenue, you can often secure a more substantial loan amount.

However, to qualify for a short term business loan, lenders typically require good credit, stable revenue, and, in some cases, collateral. The approval process may take longer than a merchant cash advance, but many online lenders, like Biz2Credit, offer quick funding, with money available in as little as 24 to 72 hours.

What is a Merchant Cash Advance?

This form of financing offers a large amount of cash up front to a business in return for a percentage of future credit or debit card sales. These loans are suitable for those businesses that experience high credit card sales but variable income. But in comparison to traditional business loans, a merchant loan (MCA loan) is not a loan. It is an advance given on future sales, making it perfect for businesses with poor credit.

Merchant cash advances are popular for their speed and accessibility. Even businesses with poor credit can qualify, and there’s no fixed payment schedule. Instead, repayments fluctuate based on your sales, making this a flexible option during slower months.

Benefits of a Merchant Cash Advance:

·      Fast Funding: Approval and funding can often happen within 24 hours, making MCAs one of the fastest ways to get cash.

·      Flexible Repayment: Because payments are based on sales, you’re not locked into a fixed monthly payment. If sales are slow, repayments will adjust accordingly.

·      Low Credit Requirements: If you have less-than-perfect credit, you’re more likely to qualify for an MCA than a traditional loan​.

However, the ease and speed of obtaining an MCA come at a cost. Interest rates are significantly higher than short-term loans, often equating to an APR of 30% or more. Additionally, because payments are made daily, cash flow can become tight, especially during low-sales periods.

Short Term Business Loans vs Merchant Cash Advances

·      Cost of Borrowing

Short term business loans generally have lower interest rates compared to merchant cash advances. With a traditional loan, you’ll have a clearer understanding of the total amount you owe, as the interest rate is fixed upfront. In contrast, MCAs tend to have much higher interest rates, often leading to a higher total repayment amount, even though the repayment process may seem more flexible​.

·      Repayment Terms

The structured repayment terms of a short-term loan can be an advantage for businesses that prefer predictable expenses. A short-term loan typically has a fixed repayment schedule, allowing you to plan for monthly or weekly payments. This predictability can help you maintain control over your finances. On the other hand, an MCA adjusts based on your daily sales. While this can be helpful during slow periods, it can also disrupt your cash flow if sales are consistent but not high enough to cover daily payments.

·      Eligibility Requirements

Short term business loans tend to have stricter eligibility requirements. Lenders will evaluate your credit score, revenue history, and, in some cases, ask for collateral. This can make it harder for new businesses or startups to qualify unless they have strong financials​. In contrast, MCAs are much easier to qualify for, with many lenders willing to overlook credit scores and focus instead on your daily sales volume. This makes them a good option for businesses that don’t have strong credit or are just getting started.

·      Speed of Funding

If you need cash fast, both options offer relatively quick access to funds. However, MCAs are generally faster, with many providers offering funding in as little as 24 hours. While short-term business loans can also be fast, they typically take a little longer—between 24 and 72 hours for approval and funding​.

When is a Short Term Business Loan the Better Choice?

A short term business loan is usually the better option if you:

• Have a solid credit history and can qualify for lower interest rates.
• Want predictable payments that you can plan around.
• Need a larger loan amount to support growth or expansion.
• Want to avoid the high interest rates and daily payment obligations of MCAs​.

When is a Merchant Cash Advance the Better Choice?

A merchant cash advance may be a better fit if:

• You have poor credit or a limited business history.
• You need fast cash and can’t afford to wait for a traditional loan approval process.
• Your business has consistent daily credit card sales, making it easier to repay the advance based on daily revenue​.

Conclusion

Both short term business loans and merchant cash advances offer valuable funding solutions for small businesses and startups, but they cater to different needs. A short term loan provides structure and lower costs, making it ideal for businesses with good credit and the ability to make regular payments. Meanwhile, a merchant cash advance offers speed and flexibility for businesses that may not qualify for traditional loans or need cash immediately.