How s a Merchant Cash Advance Different Than a company Loan?

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

A complete discussion of all the differences is beyond the scope of this article, but the following are 4 basic points that can help you much better understand how to evaluate your options:

MCA: Involves the sale of an asset (a portion of future credit card receivables) by a business to an MCA provider. Typical Company 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 an obviously established interest rate (either fixed or even variable).
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MCA: Collateral is not pledged to secure “payment” (i. e., shipping 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 from the debt.
MCA: Do not have fixed, regular payment amounts or a set maturation 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 varieties of business loans cannot be arranged without some sort of personal guarantee to secure the lender’s right to repayment.

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

However — which is very important — Merchant Cash Advance contracts contain certain covenants concerning (among other subjects) how the MCA company will collect the future credit card receivables it purchased (i. e., with the business client’s credit card processor). For example , Merchant Cash Advance agreements typically supply that the business client will solely 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 this kind of covenants.

Basically, this means that if the company honors the covenants of the Vendor Cash Advance agreement but goes out associated with business anyway, neither the business neither the guarantor would be obligated to provide the purchased receivables to the MCA provider, and the MCA provider has the risk of loss. If, however , the particular Merchant Cash Advance agreement covenants are usually breached, then the Merchant Cash Advance company can pursue the business and the guarantor.