Business Credit Cards vs. Merchant Cash Advances – Pros and Cons of Each
As a business owner, when you are in a pinch and need access to working capital immediately you might be tempted to put your expenses on a credit card and pay it off later when you can. However, that might not be the most cost effective strategy. Other alternative funding sources, such as a merchant cash advance, might prove to be more beneficial than you think.
Understanding What A Merchant Cash Advance Is
A Merchant Cash Advance (MCA) or Revenue Advance is an alternative business funding source that can be used when collateral or credit score is lacking. A merchant cash advance is the purchase of a business’s future credit card sales. Unlike a traditional loan that requires a fixed monthly payment, the business will only make flexible daily or weekly remittances to repay the advance based on a set percentage of actual future credit card sales until the loan amount is paid off.
For example, if you get an advance of $10,000 and your factor rate is 1.2, you will eventually repay $12,000. Let’s say 10 percent of your credit card sales are deducted until you reach the $12,000 - If you typically earn $20,000 in credit card sales each month, the loan will be repaid within about six months. If your revenue drops to $10,000 per month, it will take 12 months to repay the loan.
It is important to remember that a merchant cash advance carries no interest rate, so your outstanding balance will never increases due to compounding daily interest.
No compounding interest
Easy to apply and qualify
Funds are received quickly
Does not require good credit or collateral
Repayment is flexible and based on future revenue so you never pay more than a set percentage of your total sales
Can be more expensive than a traditional business loan
Payments are made daily or weekly, not monthly
Does not help build good credit since they are not reported to credit bureaus
Business Credit Cards
A business credit card has all the same functionality of a personal credit card, however they are issued to a business owner and typically have higher credit limits and lower interest rates. If you already have a business credit card, it can be a good way to get working capital for your business. However, if you have bad credit, you may not be able to qualify for a new business credit card
Can earn rewards such as cash back
Can help build your credit score
Can get a lower APR if you have good credit
You decide how much to pay each month
Rates are variable
Come with high interest rates if you only make the minimum payments
Repayment is less flexible, compared to a merchant cash advance
Can negatively affect your credit score
Remember, business credit cards are a good option only if you already have established credit.
Which Option Is Right For You?
You should now have a better understanding of the pros and cons of a business credit card and a merchant cash advance. Before you commit to any type of alternative financing, it’s crucial that you do your due diligent. It is always best to consult with a professional to review and discuss your options.
If you think your business could benefit from a merchant cash advance or any of our other funding solutions, consider applying through ACR Funding. We have years of experience in providing alternative funding solutions for businesses of all types. We offer approvals within 24 hours and do not charge an application fee. Contact one of our representatives today to learn more about our services.