How does a Merchant Cash Advance differ from a business loan?

When evaluating all of your possible business options, it is VERY important to understand some of the clear distinctions between a Merchant Cash Advance (or “MCA”) and a business loan. Knowing how they differ will allow you to pursue the best possible solutions for the many circumstances your business will face.

A complete discussion of all of the differences is beyond the scope of this article, but the following are four basic points that can help you better understand how to evaluate your options:

• Merchant Cash Advance
  Involves the sale of an asset (a portion of future credit card receivables) by a business to an MCA provider.
  
  Typical Business Loan
  Involves the creation of debt by the acceptance of a sum of money with the agreement to repay the money with interest.



• Merchant Cash Advances
  There is no interest or interest rate because an MCA does not create a loan.
  
  Typical Business Loans
  Lender charges interest at a clearly established interest rate (either fixed or variable).



• Merchant Cash Advances:
  Collateral is not pledged to secure “payment” (i.e., delivery of the purchased receivables), but may be pledged to secure “performance” (see below).
  
  Typical Business Loans
  Often requires a pledge of collateral to secure repayment of the debt.



• Merchant Cash Advances
  Do not have fixed, regular payment amounts or a set maturity date.
  
  Typical Business Loans
  Usually have fixed payment amounts, and always have a maturity date.

What about personal guarantees?
Business loans sometimes require personal guarantees of repayment. A guarantor (the individual offering the personal guarantee) may or may not be the owner of the business/borrower, but many types of business loans cannot be arranged without some sort of personal guarantee to secure the lender’s right to repayment.

The lender can employ a personal guarantee to collect amounts owed under the loan from the guarantor if the borrower goes out of business or fails to pay for any other reason. Guarantees are usually pretty specific as to when and how they can be employed. Merchant Cash Advances do not employ personal guarantees of “payment” (i.e., that the business will generate and deliver the purchased future credit card receivables to the MCA provider).

However -- and this is very important -- Merchant Cash Advance agreements contain certain covenants concerning (among other subjects) how the MCA provider will collect the future credit card receivables it purchased (i.e., through the business client’s credit card processor). For example, Merchant Cash Advance agreements typically provide that the business client will exclusively use a certain credit card processor and will not switch its processor without the MCA provider’s consent. Merchant Cash Advance agreements often require that the owners guarantee the business will perform such covenants.

Basically, this means that if the business honors the covenants of the Merchant Cash Advance agreement but goes out of business anyway, neither the business nor the guarantor would be obligated to deliver the purchased receivables to the MCA provider, and the MCA provider bears the risk of loss. If, however, the Merchant Cash Advance agreement covenants are breached, then the Merchant Cash Advance provider can pursue the business and the guarantor.

Need More? For more answers to the differences found between these two options, we encourage you to send us your specific questions.

You can also access other posts in this blog to help you better understand how a Merchant Cash Advance Works, What a Business Cash Advance is, and figure out if you qualify for a Merchant Cash Advance.