If you are looking for working capital for your small business, how do you know if a business loan or a cash advance is the right funding option for you? You can use both of the funding programs for a variety of business expenses, such as buying inventory, financing the marketing campaigns, purchasing new business equipment or workplace and much more.
However, there are some major differences between these two funding programs. In general, business loans provide rates that can be favorable for small businesses, simultaneously a cash advance offer more flexible eligibility requirements.
Let’s take a look at each business funding option in more detail.
Small business loans are well-known type of business financing particularly intended for small business functions. Like any other funding program, they come with an interest rate and a repayment term. Together, the interest rate and the repayment terms determine how long and how much you’ll need to pay back for a loan. The higher the interest rate, the greater you’ll pay to borrow cash.
Advantages Of Business Loans
Business loans have been a well-known business funding program, and there are numerous good reasons for that. Considerably, business loans normally features:
- Decrease Overall Cost: Business loans by the SBA currently have interest rate of 8.25% or less.
- Fixed Repayment Amount: Most of the businesses find it less complicated to budget with a fixed monthly payment amount.
- Fixed Repayment Term: Some businesses prefer understanding exactly how long it’ll take to repay the loan.
- Ability To Pay Back Sooner: Business loans allow for earlier repayment, allowing you to save on interest rate.
Disadvantages of Business Loans
There are some drawbacks to business loans, as well. The negative factors include:
- Eligibility requirements are stringent
- Good personal credit is required
- When the sales are slow, you still owe to pay full monthly payments
Business Cash Advances
A business cash advance is much different than any other business funding program in that a lender basically pre-purchases some of your credit card sales, offering money to you. Consequently, the lender possesses some of your future credit card sales, and will collect the amount from those sales. Unlike other funding programs, business cash advances don’t have an interest rate, or a set repayment term. Alternatively, the lender recovers the principal and its income by means of taking a percent of your credit card sales daily until you have repaid the whole borrowed amount.
Advantages of Cash Advances
The business cash advance program frequently features:
- Less Stringent Eligibility Requirements: It is also possible to meet the criteria for a cash advances with bad personal credit or even if you’ve been rejected for a loan.
- Repayment Based On Sales: Since in this financial setting the lender deducts the payments from your credit card sales, if you have a sales wise slow day, you pay back lower amount.
- No Fixed Repayment Terms: Cash is deducted from your daily sales until you’ve fully paid back the amount.
Cash advance for business normally requires a strong history of credit card sales in place of good personal credit. You may have to confirm that you have been in business for a certain amount of time, and taking credit cards at some stage in that time. You don’t need to present any collateral for cash advances.
Disadvantages Of Cash Advances
There are some drawbacks to business cash advance, as well. The negative factors include:
- Difficult to accurately budget
- There is no option to repay quickly
- Cash advances frequently comes with a higher cost to borrow
Each of these funding programs has their own benefits, so select carefully as per your specific financial requirement.