Advantages of a Working Capital Loan Over a Merchant Cash Advance

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This blog was last updated on April 26, 2021.

When you’re in the process of acquiring business capital, it’s important to know the differences between major funding types. A merchant cash advance (MCA) and a working capital loan may seem similar in many respects but there are important differences that you should be aware of.

What is a Merchant Cash Advance?

A merchant cash advance is a cash advance that’s repaid in daily, variable amounts, as a percentage of each debit card or credit card transaction until the agreed-upon amount and fees are repaid. Businesses who are approved for an MCA receive a lump sum from the lender and pay the loan back through a percentage of their sales.

Advantages of a Merchant Cash Advance

Business owners may be drawn to a merchant cash advance because of the relative flexibility when compared to large, traditional bank loans. Cash advance institutions aren’t typically concerned with a borrower’s creditworthiness; instead, they typically look to see that you have consistent daily sales rolling in.

As long as you can provide point-of-sale or bank data showing what your cash flow looks like, you’re likely to be approved for a merchant cash advance.

Disadvantages of a Merchant Cash Advance

While a merchant cash advance may be a great fit for some business owners, there are several drawbacks to this type of loan to be aware of.

1. MCA’s Aren’t Legally Considered Business Loans

A large disadvantage of merchant cash advances is that this type of capital is not technically a loan. Rather, it’s legally considered a sale of a percentage of the business owner’s future sales.

This classification means that businesses who acquire funding through an MCA aren’t held to the same standards as financing institutions who legally call their product a loan, nor are they held to state usury laws. By taking advantage of this kind of financing, you could put yourself at risk for predatory lending practices, damaging your business’ finances.

2. Your Approved Amount Could be Limited

The amount of a merchant cash advance is predicated largely upon your credit and debit card transactions. If your business conducts many transactions via wire transfer, ACH, or cash, this may adversely affect the amount of capital you’re eligible to borrow.

For example, if your total revenue is $1M but only $400k is comprised of card transactions, this could limit the funding amount available to you.

3. Payment Terms Are Difficult to Predict

Merchant cash advance loans are repaid as a percentage of your daily sales, which can fluctuate largely from day to day. This makes it difficult to know for sure when your loan will be repaid in full, which may make it hard to plan for future financial contingencies.

Additionally, many merchant cash lenders require that you switch to their approved credit card processor, which can put a hiccup in your operations and cause delays when it comes to accessing your cash flow.

What is a Working Capital Loan?

A working capital loan increases your operating liquidity and cash flow, providing you with the capital you need to maintain daily operations. Once approved, you receive a lump-sum loan, and the funds can be used for any business purpose – you can use this capital to reinvent your marketing campaign, upgrade your equipment, take advantage of an expansion opportunity, or simply get ahead financially1.

Like merchant cash advances, working capital loans can be repaid in small, daily, manageable repayments. But unlike merchant cash advances, working capital loans are legally loans, which mean that you have the benefit of state usury law on your side, and you’re better protected against predatory practices.

Even if you qualify for a business loan from a large, traditional bank, working capital loans have high approval rates, require no collateral, and can be a great alternative funding option for many business owners. Mulligan Funding specializes in providing access to flexible funding solutions for small businesses.

Advantages of a Working Capital Loan

Working capital loans are flexible and can be a good choice for small businesses of many types, such as HVAC, restaurants, retail, auto repair, and more. They also aren’t subject to the credit card and debit card transaction restrictions that come with merchant cash advances.

1. Payment Terms Are Convenient

Working capital loans are repaid in small, daily amounts automatically, but unlike merchant cash advances, the amount is predictable, which can make planning easier. Once approved for a loan, you’ll have a consistent payment amount that you can count on and plan for.

2. Your Loan Isn’t Tied to Card Transactions

This type of loan is an appropriate solution for many businesses, not just businesses that primarily deal with credit card sales. Because working capital loans aren’t tied to your credit card transactions, you don’t have to switch payment processors.

Additionally, you might be able to qualify for a higher loan amount because all of your revenue is considered in a working capital loan offer, not just your card transactions.

3. Funds Can Be Used for Any Business Purpose

Working capital loans give you access to capital that you can use for any business-related purpose, making them a great choice for taking advantage of that growth opportunity you’ve had your eye on or getting ahead on accounts payable1.

Other advantages to working capital loans are lender-specific. For example, when you work with Mulligan Funding, the advantages include:

  • Seamless application process
  • Fast disbursal of funds once approved*
  • Small, manageable daily repayments
  • No collateral required

A working capital loan can be the solution you need to tackle any of your upcoming business plans. So how do you find the right lending partner for your working capital financing?

Finding the Right Lending Partner for Your Business

Once you’ve decided which type of capital solution is best for your needs, it’s time to find a lending partner to work with. As a small business owner, you want a lending partner that values you and your business instead of just seeing you as “a transaction” to make a buck. Large, traditional banks are abundant and easy to find, but they can be difficult to get approved by.

When you seek out access to business financing with the help of Mulligan Funding, you take advantage of our experienced loan advisors, who are ready to help elevate your business to the next level of success. Finding a lending partner that you can trust to treat you fairly and with respect isn’t always easy. But at Mulligan Funding, we believe that trust is earned one client at a time, and we look forward to earning yours!

Ready to discuss available financing options for your business? Call Mulligan Funding at 855-326-3564 to learn more today!

The information shared is intended to be used for informational purposes only and you should independently research and verify.

Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.