When you are preparing to start a small business, one of the first things you do is take out a loan. An injection of cash is necessary to cover all of the costs of a start-up. Acquiring a location, activating utilities, buying inventory, and purchasing supplies all take money.
But there is more than one way to acquire the funds you need. While traditional loans were the way most businesses got started in the past, things like a merchant cash advance are now available.
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Difference between loans and merchant cash advances
Loans and cash advances, including those offered by merchant cash advance companies, are similar in some ways. They both provide you with a way to get some money to cover your expenses. But the way that they work and how you repay them are very different.
Traditional loans
Going to the bank and taking out a loan has not changed much:
- You put up collateral, which would probably be a stake in your business.
- The bank gives you a lump sum of cash to use for your expenses.
- You set up a schedule and make monthly payments.
Long-term loans provide you with opportunities to get more money later on. Or you could choose a short-term loan that might give you a smaller amount of money, but you will be able to pay it off much faster
The downside to a loan is that you have to provide collateral so that if you fall into default, you could lose your business. There is also the fact that the bank will consider your credit. If your credit score is low, you could be turned down or face a very high-interest rate.
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Merchant cash advances
Many small business owners like cash advance better. With a merchant cash advance, you can get an immediate lump sum of money that does not have to be repaid until your business starts making money. Instead, the repayment comes out of credit card transactions that you make with your customers.
The upside to merchant cash advances is that you do not have to provide any collateral. It also does not take your credit into account. They also do not require a monthly payment. Instead, they take a percentage of your sales. So if business is good, the advance will get paid off faster.
The downside is that cash advances usually have a higher interest rate than a bank loan. So, while it may be easier to pay it back because you do not have to worry about a monthly payment, you will ultimately be paying more money over time.
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Final thoughts
If you have struggled with your credit, you may find it hard to get a loan from a bank. A cash advance might be the way to go for you. However, if you want to use a traditional loan to guarantee future money, it could help build your business’s credit score.
Whatever way you decide to go, planning will be the best thing you can do. First, plan exactly how much you need and what you will spend it on. Then, when you know if you need a large lump sum immediately or if you can take what you need over time, you can decide which option is the best choice for you.