What are the Differences between a Merchant Loan and a Small Business Loan?

If you didn’t know any better, you might assume they were the same thing. But a merchant loan and a small business loan are worlds apart. Let me explain:

A Small Business Loan

This is where a business owner goes to a bank or other lending institution and asks for a loan. In order for him (or her) to get the loan, he will need to supply the following; business tax returns, personal tax returns, business guarantees and collateral. The collateral is generally a piece of real estate like your home or business location that has equity in it.

The bank will then check your credit and spend the next 4-8 week sifting through your records. If you are approved, the bank often limits you on how you spend your money. This process can be very intrusive and frustrating, often involving several meetings.

If and when you are approved, they will set up a fixed payment schedule based upon the loan amount and a percentage rate. This payment schedule does not change no matter how much your business fluctuates or if your business is seasonal.

A Merchant Loan

A merchant loan goes by many names: Merchant Cash Advance, Business Cash Advance or Credit Card Factoring. Regardless of what you call it, it all means the same thing.

Getting a merchant loan is relatively simple. Here is what you need: You need to have been in business for at least 4 months and provide 4 months of merchant statements of at least $2,500 for each of those months.

The application process involves a simple two page form and approval takes between 24 to 48 hours. Once approved, the cash is deposited to your account in less than a week.

Although your credit score is not that important; it is important that you are up to date with your mortgage payment and that you don’t have any current tax liens.

The merchant loan is paid back using a percentage of your daily credit card sales. Because you use a percentage of your daily credit card sales; you pay back less on slow days and more when business picks up.

Repayment occurs automatically and goes with the flow of your business. This creates an environment that puts the least amount of strain on your business.

Which should I choose?

A merchant loan is more expensive than a small business loan. It is typically used by businesses that have difficulty obtaining credit or if they need the money in a hurry.

If you have no problem getting a bank loan and you do not need the money in a hurry; I would suggest going that route.

How quickly do you need funding?
As previously mentioned, a small business loan takes up to 8 weeks while merchant loans take less than10 days.

How do you feel about using your home or business as collateral?
While a small business loan requires some form of collateral, a merchant loan does not. If for whatever reason your business fails; you both loose.

How is your credit?
For a traditional small business loan, banks will look into your business credit and your personal credit. They generally go back several years into your credit history.

The key decision making factor for your merchant loans is your businesses credit card sales. If your business generates consistent credit card sales; you are likely to get funded.

Merchant Loans
Learn more about merchant loans