Pros and Cons of Merchant Cash Advances vs. Business Credit Cards

Merchant cash advances and business credit cards are two common options for small business owners looking to access additional working capital. Both offer advantages and disadvantages, so it’s important to understand how they work before deciding which is the better choice for your business.

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a lump sum of money provided to a business in exchange for a percentage of future credit card sales. It is not technically considered a loan, but rather a purchase of the business’s future receivables.

Here’s how it works:

• You receive an upfront sum of capital from an MCA provider. This can range from $5,000 to over $500,000.
• Instead of making fixed monthly payments like a loan, you repay the advance by allowing the MCA provider to take a percentage of your daily credit card sales.
• The repayment amount fluctuates based on your sales volume – on slow days your payment is lower, and on busy days your payment is higher.
• You continue repaying the advance until the full amount plus fees is paid off, which typically takes 3-18 months.

The main advantages of merchant cash advances are:

• Fast funding – you can get approved in as little as 24 hours and receive funds in your account in a few days.
• Flexible eligibility – MCAs consider your business’s potential rather than just your business and personal credit scores.
• No collateral required – you don’t need to put up any business or personal assets as security.
• Payments fluctuate with sales – your daily repayment amount goes up and down with your credit card receipts.

The downsides are:

• Very high costs – MCAs can have an APR equivalent over 100%, sometimes up to 200%.
• Daily repayment – funds are deducted from your receipts every day until the balance is paid off.
• Short repayment terms – MCAs are designed as short-term financing and typically must be repaid within 6-18 months.

What is a Business Credit Card?

A business credit card is a revolving line of credit that can be used to purchase goods and services for your business. As with personal credit cards, you receive a statement each month with your balance and minimum payment due.

The advantages of business credit cards include:

• Revolving credit – you can continually borrow up to your credit limit as long as you make your monthly payments.
• Lower costs – interest rates are generally under 20% APR.
• Flexible payments – you choose how much to pay each month as long as it meets the minimum.
• Can help build business credit – responsible use helps establish positive payment history.
• Earn rewards – many cards offer cash back, points, or miles that can benefit your business.

Some potential cons of business credit cards are:

• Lower limits – credit lines usually range from $1,000 – $25,000 for new businesses.
• Personal guarantee – most cards require the business owner to personally guarantee repayment.
• Carrying balances costs more – interest charges accrue if you don’t pay your balance in full.
• Credit checks – applying requires personal and business credit checks which can negatively impact scores.

Key Differences

When considering a merchant cash advance versus a business credit card, some of the main differences to note are:

Approval requirements – MCAs generally have more relaxed eligibility standards focused on credit card sales volume rather than credit scores. Business cards require good personal credit.

Costs – MCAs are extremely expensive with APRs over 100%. Business cards have lower interest rates if balances are not paid in full.

Repayment structure – MCAs deduct a percentage of sales daily until repaid. Business cards have flexible monthly payments.

Credit impact – MCA repayments are not reported to the credit bureaus. Business cards can help build credit with responsible use.

Funds access – MCA provides a lump sum upfront. Business cards offer revolving access to the credit line.

Use of funds – MCAs have no restrictions on use of funds. Business cards are for business operational expenses.

Collateral required – MCAs do not require collateral. Most business cards require a personal guarantee.

Ideal usage – MCAs are better for one-time expenses and short term needs. Business cards are better for ongoing operating expenses.

When Should You Consider a Merchant Cash Advance?

A merchant cash advance can be a reasonable option for small businesses in certain circumstances, such as:

• You need funds quickly for a short term or one-time business expense. The fast approval and funding of MCAs can help meet immediate capital needs.
• You don’t qualify for traditional financing. MCA eligibility requirements are more flexible than most small business loan programs.
• You need a smaller amount (under $50k) for a short period. MCA terms are 6-18 months making them suitable for smaller capital needs.
• Your business is highly seasonal. The adjustable daily repayments can help match slower winter cash flows.
• You plan to repay quickly. If your business has high sales volume, you can potentially repay an MCA faster to reduce the overall costs.

When Might a Business Credit Card Be a Better Option?

In some situations a business credit card can be a more affordable source of funding, such as:

• You need a revolving credit line for ongoing operating expenses. Business cards allow you to continually borrow up to the credit limit.
• You want to separate personal and business expenses. Business credit cards keep business purchases separate from your personal finances.
• Your business has significant monthly expenses. Cards allow you to spread repayment of large monthly costs over time.
• You want to build business credit history. Responsible card use establishes positive payment data with credit bureaus.
• You can pay balances in full monthly. If you pay your balance off each month, you can avoid interest charges.
• Your needs are under $10k. Most starter business credit cards have limits up to $10k which can meet small funding needs.
• You want card rewards. Some business cards offer generous cash back, points, or travel miles that can benefit your company.

Tips for Comparing Your Options

If you’re trying to decide between a merchant cash advance and a business credit card, here are some tips that can help:

• Calculate the true cost of an MCA including fees using the factor rate and compare it to credit card interest rates.
• Consider the repayment structure and which option aligns better with your projected cash flow.
• Review eligibility criteria for both options and choose the one you are more likely to qualify for.
• Look at your credit reports to understand if you need to build your business credit before applying for a card.
• Compare your projected use of funds to the ideal usage for each option – one-time costs are better for MCAs while recurring expenses favor cards.
• Talk to your accountant or financial advisor about impacts on your financial statements and tax deductions.
• Review contracts carefully and run calculations with different sales projections to understand total repayment costs.

Which is Better for Your Business?

There is no definitive answer on whether a merchant cash advance or business credit card is the better choice. It depends entirely on your specific situation. Carefully consider your business’s financial position, credit standing, projected needs for funds, and ability to repay. Weigh the pros and cons of each option relative to your circumstances. Seek advice from your financial or legal advisors as needed before committing to either financing product. With the right information, you can determine which option may be better suited to help your business access the working capital it requires.