Merchant Cash Advance vs. Bank Loan: 5 Key Differences

black woman with apron standing in storefront

If you need funding for your small business, there are many financing options. Depending on your situation, needs and goals, you may consider a merchant cash advance (MCA) or a bank loan.

Before signing away for the funds, it’s important to note that the two options couldn’t be more different in many ways. Here are the five biggest differences to remember as you shop around and compare options.

Merchant Cash Advance vs. Bank Loan: 5 Differences to Note

When comparing a merchant cash advance vs. a business loan, here’s what borrowers need to know about how their features break down.

1. Costs

Whether you’re looking to apply for a merchant cash advance or a traditional bank loan, there are costs associated with accessing funding for your business. But how costs for those business funding options are calculated are very different.

With a bank loan, you’ll get a more traditional approach. The lender will assign you an interest rate based on business or possibly personal creditworthiness, and it’ll be represented as an annual rate. The lender uses that rate to amortize your loan, and each payment will include both principal and interest.

In some cases, lenders may also charge additional fees, such as origination fees, late fees, and more.

If you pay off the loan early, you can typically save on interest because interest accrues as you pay it down.

On the other hand, MCA providers charges a fixed amount of interest using what’s called a factor rate. If you have a 1.2 factor, for instance, you’ll pay 20% of the advance amount in interest — for a $10,000 advance, you’ll ultimately pay back $12,000.

Remember, though, that the amount of interest is fixed, so if you pay back the funds ahead of schedule, you don’t benefit.

It’s also important to note that merchant cash advances are far more expensive than small business loans. With bank loans, you may be able to secure an interest annual percentage rate in the single digits, while merchant cash advance factor rates can be much higher.

2. Eligibility Criteria

Bank loans can be difficult to get for a small business owner. Banks tend to have the strictest eligibility requirements because new businesses have a high failure rate. That means you may need to have been in business for two or more years and meet annual revenue requirements.

In addition to your time in business and your revenue, banks will also consider several other factors, such as your:

With a merchant cash advance, the credit requirements are far less stringent, as are the operating requirements. As a result, newer businesses may qualify if they meet other criteria.

Instead of focusing more on credit history, your cash flow is the most important factor. Merchant cash advance providers will review your credit and debit card sales or your bank statements to determine if you have the cash flow required to make your payments.

3. Repayment Process

With a small business loan from a bank, you’ll make monthly payments, with each one paying accrued interest and some of your principal balance. The repayment schedule is similar to other installment or term loans that you might be familiar with, such as a mortgage, auto, and personal loans.

With MCAs, your payments couldn’t be any more different from a traditional loan. Instead of monthly payments, you may have payments taken from your monthly or daily credit sales or bank account.

Additionally, if your merchant cash advance is based on your debit and credit card transactions and receivables, you’ll typically have a percentage of future credit card sales taken out instead of a fixed amount. This can be helpful during times when sales are down, but that also means it’ll take you longer to pay off the debt.

If you have an ACH merchant cash advance, which is based on the income and expenses in your bank account, the daily or weekly payment amount may be a fixed.

4. Speed

While bank loans are generally better than merchant cash advances, the approval process and loan closing can take weeks or even months. This may not be a big deal if you don’t necessarily need the funding quickly. You’ll generally get your loan as a lump sum once the process is complete. But if you’re in a bind financially, it may take too long.

On the flip side, merchant cash advance companies a much shorter application process. MCAs can fund within a day or two after you’ve applied and been approved.

This speed can give merchant cash advances a big advantage when compared to bank loans. But remember, there are trade-offs that borrowers have to make to get that speed, and the costs may not be worth it.

5. Purpose

Like other forms of business financing, bank loans and merchant cash advances serve different purposes and business needs. It’s highly likely that if you’re considering one, you may not even be in the market for the other.

A bank loan is a better fit for small business owners who need a lot of capital for some major investments in their company and have the credit score to back up for traditional funding. That may include some working capital needs, but it may lean toward equipment, research and development and other major financing needs.

And again, because bank loans tend to take a while to fund, they’re better for long-term business planning than short-term financing needs.

In contrast, merchant cash advances are generally used by small business owners who have short-term cash flow issues. For example, you may consider one to help pay a vendor, cover payroll, or buy much-needed inventory or supplies to keep your business running. Unlike bank loans, merchant cash advances are often not considered loans and are designed mostly for working capital needs.

This is also why they tend to be more expensive because they’re short-term in nature.

Merchant Cash Advance vs. Loan: Which Is Better?

For the most part, if you’re considering financing for your business, it’s best to consider anything other than a merchant cash advance.

This form of financing — it’s technically not even a loan — is expensive. Moreover, many merchant cash advance contracts can contain predatory language that could put the business at a severe disadvantage if they can’t afford to repay the debt.

So even if you just need some money for everyday expenses, it may be better to consider a business credit card or a business line of credit. While online loans and lines of credit are more expensive than bank loans, they’re generally much cheaper than merchant cash advances, and they also have more favorable repayment terms and safety nets if you can’t make your payments.

That said, if you’re looking for long-term financing, merchant cash advances shouldn’t be on your radar at all because they’re geared more toward short-term needs. If your business has been operating for several years and you have solid revenues and an established business credit history, you may qualify for a bank loan or government loan through the SBA.

However, if you need long-term financing but don’t meet those criteria, consider an online loan or line of credit, or even a micro loan if your business is just getting started.

The Bottom Line

If you’re comparing a merchant cash advance versus a bank loan, you must take the time to understand the differences and how each can help you. Additionally, if you need capital for your company, consider other forms of business financing and do your due diligence to determine which is the best option for you.

cartoon man with envelope

Money moves to help you stay on track

Sign up for monthly updates, articles, money advice, and timely topics to keep your finances on track.

Related Posts

How does a merchant cash advance work

How Does a Merchant Cash Advance Work?

As a small business owner, you’re likely familiar with the financial struggles of trying to grow a business while keeping up with operational expenses. In fact, you’ve likely come across a popular financing option known as a merchant cash advance (MCA). But you might be wondering: How does a merchant cash advance work, exactly? Read […]

Read Now
Merchant cash advance defense

Merchant Cash Advance Defense: How to Protect Yourself From Lawsuits

Are you a merchant cash advance borrower who is facing legal action from an MCA provider? This can be a scary and stressful situation. The good news is there are measures you can take to safeguard yourself and your rights. Read on to learn the options available for a merchant cash advance defense when facing […]

Read Now
Can you write off merchant cash advance on taxes

Can You Write Off a Merchant Cash Advance on Taxes?

With the cost of running a business rising, many entrepreneurs are turning to merchant cash advances for additional capital. But can you write off a merchant cash advance on your taxes?  Whether you’re considering taking out an MCA or already have one, it’s important to understand how they affect your business and, ultimately, your taxes. […]

Read Now

What is debt relief?

Debt relief is an umbrella term representing many solutions that may lower your debt. What kind of debt do you have?

black woman cartoon next to question mark

Need other debt help?

If you’re dealing with a lawsuit, judgment, frozen bank account, notice of wage garnishment, lien, or simply feel out of control of your debt–you are not alone. Give us a call or schedule a free consultation. We’ll help you understand what’s going on and find the best possible debt solution.

Why people choose Tayne Law

A debt relief law firm

Personalized Program

Every situation is unique. We’ll work with you to find a solution that resolves your debt and frees up your cash flow.


You make one low monthly payment and will never get an unexpected bill.

Experienced NY Debt Attorneys

We have more than 20+ years of experience providing clients with debt relief.

Confidential & Trusted

As a law firm, our attorneys follow strict client confidentiality. Our services are discrete and effective.

Work with Creditors

We work with all creditors, whether you’re dealing with a collections firm, a national bank, credit union, or another lender.

Request a Free Consultation

Your initial phone consultation is free and requires no committment!
A team member will respond within 1 business day.

tayne icon on cartoon letter in enveloper

Message Sent!

A Tayne Law team member will respond within
1 business day.