What’s the difference between a merchant cash advance (MCA) and a term loan?

By: Jordan Grimmer | December 7, 2015 (Edited July 7, 2017)


A Merchant Cash Advance, or MCA, is the agreement between a merchant and a lender to allow for smaller payments on an amount borrowed, rather than larger payments over a longer period of time. In this agreement, merchants essentially "sell" a percentage of their debit and credit card earnings to the lender. The lender is not a bank. Because of this, they are not subjected to laws surrounding loans because the MCA is not technically a loan. Lenders can charge a much higher interest rate than banks because of this.

The biggest benefit of a MCA for a merchant is that the payments are smaller in a shorter period of time rather than having to pay a bigger chunk of money monthly or quarterly. For lots, it is easier to make smaller payments, even though those payments are usually every business day. This also shortens up the time of paying back the debt, usually to under two years. MCA's are also easier to get. MCA's do not require as good of credit scores as traditional banks do.

The biggest drawback of MCA's is, of course, the interest rates. As previously mentioned, MCA's are not governed like traditional bank loans are, which means lenders can charge much more than banks. Merchants have to be careful about which lenders they borrow from because of this.

A term loan is also a set amount loaned to a borrower, however, banks provide these loans. Term loans are paid back in smaller amounts. Unlike MCA's, however, these payments are not daily. Also unlike MCA's, the payments are a fixed amount on a fixed schedule. MCA's are different payments every day based on the income that merchants get on a daily basis. Term loans are usually fixed on a time period under five years. Term loans are not based as much on financial assets like MCA's. Instead, the payments are often attained through the income produced by products that a business or merchant uses like machinery.

The biggest benefit of having a term loan is, like MCA's, the loan is paid back in smaller amounts in a shorter amount of time. Contrariwise to this benefit, the biggest drawback to term loans is that a lot of term loans have a "floating" interest rate. This means that the interest rate fluctuates according to the market. This can be risky, especially to small business owners. However, there are some term loans that have fixed interest rates, but those can be a bit trickier to procure.

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Written by Jordan

Jordan Grimmer is the head content manager, editor, and writer at bestcompany.com. He oversees all on-site content production, the bestcompany.com Medium page, as well as his own personal blog. You can follow Jordan on Twitter.

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