Skip to content

Business Loan vs. Merchant Cash Advance – What’s Right for Your SME

Team 365 finance

Written by Team 365 finance

Help and Advice

In today’s turbulent economic climate, research shows that 92% of SMEs are worried about how the cost-of-living crisis could impact daily operations. The same study found that the largest concern (73%) was how rising costs could be absorbed by the business.

If you’re currently experiencing financial challenges, or perhaps you’re looking to scale your business but don’t have the funds, then you may be considering what financing options are available to you. Then the question arises, should you opt for revenue-based financing or take out a traditional business loan?

In this article, we take a deeper look at both traditional loans and MCAs – including the pros and cons of each option, and which one is right for your small business. Read on to find out more.

What are Merchant Cash Advances (MCAs)?

A merchant cash advance is a fast, flexible and low-risk way for businesses to increase their cash flow in the short term. Sometimes known as ‘revenue-based financing’, MCAs provide immediate funding to any UK-based company that accepts card payments. The loan amount is based on your trading pattern and repayments are made by deducting money from your card payment income.

Any business with a good volume of card transactions can apply – whether you’re a sole trader, a partnership, or a limited company. Revenue-based financing can be used to fund almost any business use case, from modernising technology, to buying stock, or investing in recruitment. As long as the loan is solely used for business purposes and not personal use, you can use the cash however you please.

Repayments for merchant cash advances can be adapted to meet your business’s financial performance, and can fluctuate based on how many card sales you’re making. This way, you pay more when business is going well, and less when it’s not – providing ultimate flexibility with no hidden fees.

What’s the Difference Between Revenue-Based Financing and Traditional Business Loans?

There are a number of key differences between merchant cash advances and traditional business loans. First off, the approval process for revenue-based financing is much quicker. You don’t need to spend hours submitting documentation or waiting weeks for a response. MCAs can be granted in as little as 24 hours.

Then there’s loan repayments. With traditional business loans, repayments are usually made in fixed instalments over a pre-agreed timeframe. In contrast, merchant cash advances are repaid through a process called ‘split withholding’, where a percentage of your card sales are automatically repaid to cover the loan.

Additionally, there’s no collateral required for revenue-based financing to be granted. Traditional business loans usually ask the borrowers for collateral, such as real estate or investments. As MCAs are unsecured loans, this means you only need to rely on the future revenue of the business – no collateral necessary.

Traditional loans usually also come with usage restrictions – for example a high street bank or other traditional lender might grant you a loan on the condition that you only use it for purchasing stock or investing in business operations. Meanwhile, MCAs have no restrictions on how the funding can be used.

Lastly, unlike traditional business loans, revenue-based financing options don’t always reject businesses with a bad credit history. There’s more of an emphasis on your business plan and sales volume. In fact, merchant cash advances have the highest approval rate for small business lending options, with MCA providers such as 365 finance having an approval rate of 90%, compared with 57% in regular business loans.

What Are the Pros and Cons of Traditional Business Loans for SMEs?

Pros of Traditional Business Loans

  • Lower cost: Traditional business loans usually have lower interest rates and fees compared to MCAs, with a fixed loan repayment schedule.
  • More time to repay: Loans from high street banks and other traditional institutions usually allow businesses to spread out loan repayments over a longer time period, however the weekly or monthly repayments remain the same despite business performance.
  • Improve credit history: Paying off a traditional business loan can help you improve your credit history and obtain future funding options.
  • Build relationships: Taking a loan from a traditional lender can help you establish a long-term relationship with a leading bank or financial institution, which could lead to additional financial support in future.

Con of Traditional Business Loans

  • Lengthy application and approval process: Traditional business loans aren’t ideal for businesses needing cash quickly. The application process is more time-consuming than that of MCAs and you could be waiting weeks or even months for approval.
  • Limited flexibility: Once your loan has been approved, there is little or no flexibility in terms of repayments or loan conditions. This means that even if your sales are down, you will still need to pay a fixed rate over the time period agreed.
  • Stricter criteria: Poor or limited credit history? You could struggle to obtain a traditional business loan. You will need a strong credit history, proof of profitability, and collateral to qualify for an advance.
  • Higher risk: As mentioned, traditional lenders may require collateral or personal guarantees from borrowers looking for a loan. This personal liability can put your business and finances at risk if you ever struggle to repay the loan. Plus, failing to repay will leave you with a bad credit rating.

What Are the Pros and Cons of Revenue-Based Financing for SMEs?

Pros of Merchant Cash Advances

  • Flexible repayments: With MCA’s, you only pay back an amount that’s relative to what you’re earning, instead of being locked into a fixed rate. This gives you reassurance that you can still repay even if sales are down, and can provide additional benefits if your business makes more sales at certain times of the year (e.g. summer or Christmas).
  • Fast approval times: Revenue-based financing is well-known for its speedy approval times, making it perfect for SMEs looking for fast access to cash. Approval can come through within 24 hours, and the funds can be in your account in a few days.
  • Low risk with minimal impact on credit rating: With MCAs, there’s no need to put down any collateral or make personal guarantees, which removes the personal liability concerns of traditional loans. What’s more, revenue-based financing won’t have a direct impact on your credit score. As long as you allow the payments to be taken as a percentage of your card sales, there’s usually no need to report to credit bureaus.
  • Freedom to spend funds how you like: Unlike the spending restrictions that traditional banks impose when granting an advance, MCAs give you the flexibility to choose how you spend your money. Looking to invest in marketing? Purchase inventory? You have the freedom to decide how the funds are used.

Cons of Merchant Cash Advances

  • Higher costs: Although revenue-based financing offers more flexibility when it comes to repayments, there are generally higher fees and interest rates to consider.
  • Overreliance can lead to debt: If you begin to rely too heavily on MCAs, then you could find yourself struggling to repay the funds and enter a cycle of debt. However, this shouldn’t be the case if you tread carefully when deciding when and why you need a merchant cash advance.
  • Less regulatory protection: Because MCAs are unsecured, they are not subject to the same level of regulatory protection in comparison with traditional loans. Always read the T&Cs beforehand to understand potential risk.

What’s the Best Loan Option for My SME?

Deciding whether you should opt for revenue-based financing or a traditional loan depends entirely on your business’s circumstances, and your reason for needing a cash injection.

Revenue-based financing tends to be a better choice for small to medium-sized businesses (SMEs), particularly those seeking emergency capital to account for short-term cash flow shortages. MCAs are also a good option if you have a limited or poor credit history and you’re struggling to access traditional financing. Additionally, you should opt for an MCA if you’re looking for a flexible, fast and scalable way to access funds.

Meanwhile, traditional business loans could work for you if you’re looking to improve your credit history, or if you need financing for a more extended period of time.

Before deciding between revenue-based financing and a traditional loan, always evaluate your specific financial needs, consider your preferred repayment structure, and assess your credit history.

A Funding Solution Designed for SMEs – Try Rev&U today

Looking for fast access to capital to grow your business or overcome short-term financial challenges?

At 365 finance, our Rev&U product offers up to £400,000 in revenue-based funding. There’s no APR or fixed monthly payments – and there’s a 90% approval rate with no strict limitations or funding restrictions. We’re the perfect option for SMEs seeking a fast and low-risk financing solution.

Head to our website to learn how it works or speak to our team to find out more and apply today without affecting your credit score.