3 Loan Options You Should Know About

Business loans, lines of credit, and revenue-driven merchant cash advances are three key forms of funding that have different characteristics and purposes. As a business owner, familiarizing yourself with these financial products and their benefits before you need additional capital can prepare you for unexpected obstacles and opportunities. Here we will review the key differences between them:

1. Business Cash Advance

A business cash advance (or merchant cash advance) is an alternative lending option that offers fast funding by prioritizing business performance over personal credit factors. Advances provide a lump sum of funds in exchange for a percentage of future receivables or sales. These options are best suited for businesses with a consistent flow of sales and are ideal for short-term cash needs. Some advances offer fixed payments that are automatically deducted from the business’s bank account on a daily, weekly, or bi-weekly basis, while others are repaid via a fixed percentage of daily credit card sales.

Minimal Qualification Requirements:

• 500+ personal credit score
• 6+ months in business
• $10,000+ monthly sales

Features:

• $5K to $1M funding amounts
• 3 to 24 month repayment terms
• 1.1 – 1.5 factor rates

Pros:

• Simple lending requirements and documentation
• Same or next-day funding
• Unsecured (no personal guarantee or collateral required)

Cons:

• Potential for expensive fees
• Shorter terms

Interesting Fact: In the US, merchant cash advances are popular among small businesses that need quick access to capital. According to the Small Business Administration, over 70% of businesses that apply for these advances are in retail or service industries due to their daily sales volume.

2. Line of Credit

A revolving business line of credit provides you with ongoing access to capital, allowing you to draw funds as needed, up to the approved limit, and only pay interest on the amount used. The flexibility of credit lines helps small business owners manage cash flow gaps during slower seasons or handle unexpected expenses, making it a viable option for meeting short-term business needs.

Minimal Qualification Requirements:

• 625+ personal credit score
• 12+ months in business
• $300,000+ annual sales

Features:

• $10K to $250K funding amounts
• 6, 12, 18, or 24 month repayment terms
• As low as 8% APR

Pros:

• Affordable rates
• Flexible, revolving capital access
• Credit-building (personal and business)

Cons:

• Stricter lending requirements
• May require a personal guarantee

Interesting Fact: Approximately 60% of small businesses in the US utilize a line of credit to manage operational expenses. The flexibility it offers makes it a favorite among businesses experiencing seasonal sales fluctuations.

3. Business Term Loan

Business term loans provide a lump sum of funds upfront, which is repaid over a specified term with interest. By infusing your business with a lump sum of working capital, term loans are great for one-time investments, large purchases, marketing, and expansion. They feature regular fixed payments (weekly, monthly, or quarterly) including principal and interest that are remitted over a predetermined schedule. Approvd offers term loans facilitated by online lenders, alternative funders, and the Small Business Administration.

Minimal Qualification Requirements:

• 680+ personal credit score (standard), 720+ personal credit score (premium)
• 12+ months in business (standard), 24+ months in business (premium)
• $180,000+ annual sales (standard), $300,000+ annual sales (premium)

Features:

• $10K to $5M funding amounts
• 6 to 60 month repayment terms
• As low as 8% APR

Pros:

• Lowest rates
• Largest funding amounts
• Credit-building (personal and business)

Cons:

• Strictest lending requirements and review process
• May require collateral or personal guarantee
• Lengthier review process

Interesting Fact: In the US, business term loans are often used for significant investments. According to the National Small Business Association, about 73% of small businesses seeking financing apply for term loans to support major growth initiatives.

Conclusion

Preparation is critical to meeting unexpected opportunities and expenses while growing your business. Consider your goals and the terms of these products to determine which best fits your financing needs.

Ready to explore your funding options? Get offers today! Fill out an application with Approvd and discover the best funding options for your business. For more insightful articles and resources, visit our Approvd Resources page.

About the Author

With over 20 years of experience in the business loan marketplace at Approvd, our expert has helped countless small business owners navigate the complexities of securing the right funding. Passionate about empowering entrepreneurs, our expert combines industry knowledge with a deep understanding of the challenges faced by small businesses today.

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