How is a Merchant Cash Advance Different Than a Business Loan?

When evaluating all your possible business choices, it is crucial to understand a few of the clear distinctions between a Merchant Cash Advance (or "MCA") and a business loan. Knowing how they differ will help you to pursue perfect 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 standard points that will help you better understand how to evaluate your choices:

• MCA: Involves the sale of an asset (a portion of future credit score 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 pay off the money with interest.
• Merchant Cash Advances: There isn't any interest or interest rate because an MCA does not really create a loan.

  Typical Business Loans: Lender charges interest at a clearly established interest rate (either fixed or variable).

• MCA: Collateral is not pledged to obtain "payment" (i.e., delivery of the purchased receivables), but may be pledged to obtain "performance" (see below). Typical Business Loans: Often requires a pledge of collateral to obtain repayment of the debt.
• MCA: Don't 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) might be the owner of the business/borrower, but many types of business loans cannot be arranged without some sort of personal guarantee to acquire 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 lender goes out of business or fails to cover any other reason. Guarantees are usually pretty specific as to when and how you can be employed. Merchant Cash Advances do not really employ personal guarantees of "payment" (i.e., that the business will generate and deliver the purchased future credit rating 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 history card receivables it purchased (i.e., through the business client's credit score card processor). For example, Merchant Cash Advance agreements typically provide that the business client will exclusively use a certain credit history card processor and will not really 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, which 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 chance 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.