Merchant cash advance vs business loan: which is right for you?

The provider looks at your historic card takings and advances a sum based on them. You agree to repay that sum plus a fixed fee, sometimes expressed as a 'factor rate'. Repayment happens automatically: a set percentage of each card transaction goes to the provider until the total is cleared.

On quieter days you repay less, and on busy days you repay more. There is usually no fixed end date, although providers will have an expected timeframe based on your typical takings.

With a term loan, you borrow a fixed amount and repay it with interest in regular instalments, usually monthly, over an agreed term. The repayment is the same regardless of how your month has gone. The loan can be unsecured, typically with a personal guarantee, or secured on business assets, for example through a debenture.

• Repayments: MCA repayments flex with card sales; loan repayments are fixed.
• Cost: an MCA usually charges a fixed fee agreed upfront, so paying back faster does not reduce the total. With many loans, interest accrues over time and early settlement can reduce the cost, subject to any charges.
• Eligibility: MCAs focus on card-transaction history, so they can suit businesses with imperfect credit. Loans look at broader affordability and credit.
• What they suit: MCAs are designed for card-taking businesses such as hospitality, retail and leisure. Loans suit most sectors.
• Regulation: MCAs are generally structured as a purchase of future receivables rather than a loan, so different protections may apply.
• Guarantees: both may involve a personal guarantee or warranties from directors; check the terms.

It is tempting to compare an MCA's fee with a loan's interest rate, but they are calculated differently. An MCA's fixed fee is paid in full whatever the repayment speed, so if you repay quickly in a busy season, the effective annual cost can be high. A loan's cost depends on the rate, term and fees.

The fairest comparison is the total amount you will repay against the amount you receive, alongside the realistic repayment period for each option. Ask each provider for these figures in writing.

• Most of your revenue comes through card terminals or online payments.
• Your trading is seasonal, and fixed repayments would strain quieter months.
• You need funds quickly and have a thinner or less-than-perfect credit file.
• You want repayments to stop being a fixed monthly burden if trade dips.

• Your income is steady and you can comfortably meet a fixed monthly payment.
• Much of your revenue is by invoice, cash or bank transfer rather than card.
• You want the option to settle early and potentially reduce the total cost.
• You are borrowing a larger sum or over a longer period.

1. How much will I receive, and what is the total amount I will repay?
2. For an MCA, what percentage of each card sale will be taken, and what is the expected repayment period based on my takings?
3. For a loan, what is the interest rate, the term and the monthly payment, and are there arrangement fees?
4. What happens if I want to settle early? Is there any discount or charge?
5. Is a personal guarantee or any other security required?
6. Are there restrictions on changing card terminal provider or taking other finance?

Getting the same figures from each provider makes a fair comparison much easier.

A revolving credit facility lets you draw and repay as needed, paying interest only on what you use, which can suit ongoing working capital needs. Some providers also offer flexible loans repaid through card takings, a hybrid of the two approaches.

Be wary of either option if you are borrowing to cover losses that are likely to continue, or if you already have one or more advances running: taking a new advance to clear an old one, sometimes called stacking, can quickly eat into margins. In that situation, talk to your accountant before taking on more.

Welcome Finance is a commercial finance broker for limited companies, LLPs and partnerships of four or more partners. We compare MCAs, loans and other facilities side by side on the total amount repayable. Check your eligibility in 60 seconds; it will not affect your credit score.