The Quick Answer
A business loan gives you a lump sum that you repay with interest over a set schedule - usually 1-5 years, with fixed monthly payments. A merchant cash advance (MCA) gives you a lump sum in exchange for a percentage of your future revenue - repaid through daily or weekly automatic withdrawals over 4-18 months.
The core difference comes down to three things: cost, speed, and who qualifies.
- Business loans are cheaper (8-30% APR vs. 40-150%+ for MCAs)
- MCAs are faster (24-72 hours vs. 1-3 weeks for loans)
- MCAs are easier to qualify for (500+ credit vs. 600+ for loans)
Neither is universally "better." The right choice depends on your credit, your timeline, and how much the cost difference matters to your bottom line.
How Each One Works
Business Term Loan
A business term loan works like most loans you're familiar with. You borrow a fixed amount. You pay it back in equal monthly installments over an agreed-upon term. Interest accrues on the remaining balance, so you pay less interest over time as you pay down principal.
- Amounts: $10,000 to $5,000,000+
- Terms: 1-5 years (some up to 10 years)
- Interest: 8-30% APR depending on credit and financials
- Payments: Fixed monthly (predictable, budgetable)
- Qualification: 600+ credit score, 2+ years in business, tax returns and financial statements required
- Speed: 1-3 weeks from application to funding
The big advantage: you know exactly what you owe every month, and as you repay the loan, the total interest cost goes down. Pay it off early and you save money.
Merchant Cash Advance
An MCA is technically not a loan. It's a purchase of your future sales. A funding company gives you a lump sum now, and you repay them a fixed total through automatic daily or weekly withdrawals from your bank account.
- Amounts: $5,000 to $500,000
- Terms: 4-18 months
- Cost: Factor rates of 1.2-1.5 (equivalent to 40-150%+ APR)
- Payments: Daily or weekly automatic withdrawals
- Qualification: 500+ credit score, 6+ months in business, bank statements only
- Speed: 24-72 hours
The big advantage: speed and access. If you can't qualify for a traditional loan or can't wait weeks for funding, an MCA gets cash in your account fast.
Key difference: With a loan, paying early saves you money because you're paying less interest. With an MCA, paying early usually doesn't save you anything - you owe the same total amount regardless of how fast you repay. A $75,000 advance at a 1.35 factor rate costs $101,250 whether you repay in 5 months or 10 months.
The Real Cost Comparison
This is where it gets real. Let's compare both options on the same $75,000 funding amount with actual numbers.
| Criteria | Term Loan | MCA |
|---|---|---|
| Amount Received | $75,000 | $75,000 |
| Cost Structure | 15% APR | 1.35 factor rate |
| Total Repaid | $93,500 | $101,250 |
| Total Cost of Capital | $18,500 | $26,250 |
| Repayment Term | 36 months | 6-8 months |
| Monthly Payment | ~$2,600/mo | ~$12,650-$16,875/mo |
| Daily Cash Impact | None (monthly) | ~$580-$780/day |
Look at the monthly payment row. The term loan costs $2,600 per month. The MCA costs $12,650-$16,875 per month. That's a 5-6x difference in monthly cash outflow.
And the total cost: $18,500 vs. $26,250. That's $7,750 more for the MCA - on the same $75,000.
Key Takeaway
The cost difference is real and significant. But cost alone doesn't tell the whole story. If you need $75,000 this week and can't qualify for a term loan, the cheaper option isn't actually available to you. The question is: can you afford to wait, and do you qualify for the cheaper product?
Full Side-by-Side Comparison
Here's how business loans and MCAs compare across every factor that matters:
| Factor | Business Term Loan | Merchant Cash Advance |
|---|---|---|
| Funding Speed | 1-3 weeks | 24-72 hours |
| Credit Score Needed | 600+ (ideal: 680+) | 500+ (revenue-based) |
| Time in Business | 2+ years preferred | 6+ months |
| Cost (APR Equivalent) | 8-30% | 40-150%+ |
| Repayment Schedule | Fixed monthly | Daily or weekly |
| Repayment Term | 1-5 years | 4-18 months |
| Early Payoff Savings | Yes - pay less interest | Usually no - fixed total cost |
| Documentation | Tax returns, financials, business plan | Bank statements, ID |
| Collateral | Sometimes required | Not required (UCC filing typical) |
| Builds Business Credit | Yes | No |
| Regulation | Federal lending laws apply | Limited regulation (varies by state) |
| Best For | Planned growth, established businesses | Urgent needs, newer businesses, low credit |
Pro Tip: Don't just compare rates. Compare monthly payments against your actual cash flow. A business doing $40,000/month in revenue can likely handle a $2,600 loan payment. That same business would feel the pressure of $12,000+/month in MCA payments - that's 30% of revenue going to repayment every month.
Real-World Scenarios: When Each Makes Sense
Numbers only tell part of the story. Here's how these products play out in real business situations:
Scenario 1: Restaurant Needs $50,000 for a Kitchen Renovation
The situation: A restaurant doing $30,000/month in revenue has been open 3 years. Good credit (680). They need to upgrade their kitchen equipment to expand catering services. The contractor is available in 3 weeks.
The right choice: Business term loan.
- They have the credit score (680) and time in business (3 years) to qualify
- The 3-week timeline lines up with term loan funding speed
- Monthly payment of ~$1,750 on a $50K loan at 15% for 3 years is manageable on $30K/mo revenue
- Total cost: ~$12,900 in interest
- An MCA at 1.35 factor would cost $17,500 in fees with payments of ~$8,400-$11,250/mo - that's 28-37% of their revenue going to repayment
Scenario 2: E-Commerce Business Needs $75,000 for Holiday Inventory
The situation: An online retailer doing $80,000/month needs $75,000 in 5 days to lock in a bulk inventory deal before Black Friday. They've been operating for 14 months. Credit score: 580.
The right choice: MCA (as a bridge).
- The 5-day timeline rules out term loans
- 580 credit makes traditional lending difficult
- 14 months in business is short for most conventional lenders
- At $80K/mo revenue, they can absorb the higher MCA payments during the holiday rush
- The key: the inventory purchase should generate 3x+ the cost of the advance
- After the holiday season, they can refinance into a cheaper term loan with the stronger revenue numbers
Scenario 3: Contractor Needs $30,000 to Cover a Payroll Gap
The situation: A small contractor with $25,000/month in revenue needs cash to cover payroll while waiting on two large invoices (expected in 30-45 days). Credit score: 610. In business 4 years.
The right choice: Consider both - but lean toward a line of credit.
- 610 credit and 4 years in business could qualify for a line of credit or short-term loan
- If the invoices arrive in 30-45 days, they only need short-term bridge capital
- An MCA on $30K at 1.3 factor = $39,000 total ($9,000 in fees). With daily payments of ~$300-$400, that's $6,600-$8,800/month on $25K revenue - tight
- A line of credit gives them flexibility to draw what they need and only pay interest on what they use
- If time is truly critical (payroll due tomorrow), an MCA may be the only option. But it's the expensive one.
Notice the pattern: In every scenario, the right product depends on three things - how fast you need the money, what you qualify for, and whether the cost makes sense relative to your revenue. There's no universal "better" product. There's only the right product for your situation.
How to Decide: Three Questions
Cut through the noise. Answer these three questions and you'll know which direction to go:
Question 1: How fast do you need the money?
- Within 48 hours: MCA is likely your only option
- Within 1-2 weeks: Term loan or line of credit is possible
- Within 30+ days: You have time to explore all options, including SBA loans for the best rates
Question 2: What does your credit look like?
- Below 550: MCA or revenue-based financing
- 550-620: Some alternative term loans and MCAs - compare offers
- 620-680: Most term loans and lines of credit are available
- 680+: Full range of conventional options. An MCA should be a last resort, not a first choice.
- 700+: Consider credit stacking at 0% APR for 12-18 months before taking on any interest
Question 3: Can your cash flow handle the payments?
- Monthly revenue under $20K: MCA daily payments will strain you. Prioritize a loan with lower monthly payments even if it takes longer.
- Monthly revenue $20K-$50K: Run the math. MCA payments should stay under 15-20% of monthly revenue to be sustainable.
- Monthly revenue $50K+: Either product is likely manageable, but the total cost still matters. Don't overpay for speed if you don't need it.
Key Takeaway
The decision framework is simple:
- If you have time + good credit = get a term loan (save thousands)
- If you need speed + have lower credit = MCA makes sense (but have an exit plan)
- If you're somewhere in between = talk to a broker who can show you all available options side by side
Pro Tip: Never take an MCA without first checking if you qualify for a term loan or line of credit. The savings are too large to skip this step. Even if your credit isn't perfect, alternative lenders can sometimes approve at rates 3-5x lower than an MCA. A quick conversation with a broker can save you $10,000+ on a single funding.
The Bridge Strategy: How to Use Both Products Smart
Here's something no other guide on this topic will tell you: the smartest business owners don't pick one or the other. They use MCAs as a bridge to get to better financing. And if your credit score is 700+, credit stacking vs. a traditional loan is another comparison worth exploring.
How It Works
- Take the MCA now - Get the fast cash you need to capture a revenue opportunity, cover an emergency, or stabilize cash flow
- Build your profile over 6-12 months - Use the capital to grow revenue, build credit, and get your financials in order
- Refinance into a term loan or line of credit - Once you qualify for conventional lending, replace the expensive MCA-style funding with something 3-5x cheaper
Example: You take a $50,000 MCA at a 1.3 factor rate. Total cost: $65,000. You use it to buy inventory that generates $120,000 in revenue over 6 months. Your business is now doing $60,000/month (up from $40,000). Six months later, you qualify for a $100,000 line of credit at 14% APR. Your cost of capital just dropped from 60%+ to 14%.
The MCA was expensive. But it was the bridge that got you to the cheaper capital. That's the difference between using an MCA strategically and using it out of desperation.
This is where a broker earns their value. A good broker doesn't just find you the cheapest rate today. They help you plan the path from where you are to where you want to be - even if that means starting with a more expensive product and working toward better terms over time. That's what we do at Huge Capital.
Frequently Asked Questions
What is the difference between a business loan and a merchant cash advance?
A business loan is traditional financing where you borrow a fixed amount and repay it with interest over a set term (1-5 years) in fixed monthly payments. An MCA is a purchase of your future revenue - you get a lump sum and repay through daily or weekly withdrawals over 4-18 months. Loans use interest rates (8-30% APR) while MCAs use factor rates (1.2-1.5, equivalent to 40-150%+ APR).
Is a business loan cheaper than an MCA?
Yes, significantly. On $75,000, a term loan at 15% APR over 3 years costs roughly $18,500 in interest with a $2,600/month payment. An MCA with a 1.35 factor rate costs $26,250 in fees over 6-8 months with payments around $12,650-$16,875/month. The loan saves $7,750+ in total cost and has much lower monthly payments.
Why would anyone choose an MCA over a business loan?
Speed and access. MCAs fund in 24-72 hours vs. 1-3 weeks for term loans. MCAs approve credit scores as low as 500 with just 6 months in business, while most term loans need 600+ credit and 2+ years. If you can't qualify for a loan or can't wait, an MCA may be the only option available.
Can I get a business loan with bad credit?
It depends on how you define bad credit. Most conventional term loans require a 600+ credit score. Some alternative lenders work with scores in the 550-600 range at higher rates. Below 550, a merchant cash advance or revenue-based financing may be your best option until you rebuild your credit.
Can I refinance an MCA into a business loan?
Yes - and it's one of the smartest moves you can make. Use the MCA for the immediate need, then refinance into a term loan or line of credit once you have the revenue history and credit to qualify. A broker can help plan the transition before you even take the MCA.
How long does it take to get a business loan vs. an MCA?
MCAs typically fund in 24-72 hours. Business term loans take 1-3 weeks. SBA loans take 60-90 days. Lines of credit take 1-2 weeks. The speed difference is the primary reason businesses choose MCAs when they need capital urgently.
Do MCAs or business loans build business credit?
Business term loans typically report to credit bureaus, so on-time payments build your business credit profile. Most MCA providers do not report to credit bureaus, so MCA payments won't improve your credit score. If building credit matters, a term loan or line of credit is the better choice.
Should I use a broker to find business funding?
A good broker with relationships across multiple lenders can match you to the right product - not just the one they sell. If you only qualify for an MCA, a broker finds the lowest factor rate across 20+ providers. If you qualify for a loan, they shop rates across banks and alternative lenders. The key is working with someone who has access to the full range of products.
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