Quick Summary: Bank loans cost less and have better terms, but they’re harder to get and take longer to fund. Merchant cash advances are fast and easy to qualify for, but the high costs and aggressive repayment terms can put your business at serious risk. If you’re already struggling with MCA debt, a debt relief attorney can help you explore your options.
MCA vs Bank Loan at a Glance
Merchant cash advances and bank loans both provide funding for your business, but they work very differently. Here’s a quick comparison:
| Feature | Bank Loan | Merchant Cash Advance |
|---|---|---|
| Typical cost | 6-15% APR | 40-350% effective APR |
| How cost is calculated | Interest rate (APR) | Factor rate (1.1-1.5) |
| Payment frequency | Monthly | Daily or weekly |
| Approval time | Weeks to months | 1-3 days |
| Credit requirements | Good to excellent | Low or none |
| Early payoff savings | Yes | No |
| Regulation | Heavily regulated | Minimal regulation |
The bottom line: bank loans are almost always the better choice if you can qualify. MCAs should be a last resort because of their high costs and risky contract terms.
Cost Comparison
Merchant cash advances are far more expensive than bank loans. The difference in cost is one of the biggest reasons to avoid MCAs if you have other options.
Bank loans charge interest as an annual percentage rate (APR). Rates vary based on your credit, but many small business loans fall between 6% and 15% APR. Interest adds up over time, so if you pay off the loan early, you save money.
MCAs use a factor rate instead of an interest rate. Factor rates typically range from 1.1 to 1.5. To calculate what you’ll pay back, multiply the advance amount by the factor rate. For example, a $50,000 advance with a 1.3 factor rate means you’ll repay $65,000 total.
Here’s the catch: that $15,000 in fees is fixed. You owe it whether you pay back the advance in three months or nine months. There’s no benefit to paying early. When you convert MCA costs to an APR for comparison, they often exceed 100% and can reach 350% or higher.
Eligibility Requirements
Bank loans have strict requirements. MCAs are much easier to get, which is part of why they’re risky.
Bank loan requirements typically include:
- At least 2 years in business
- Strong annual revenue
- Good business and personal credit scores
- Detailed financial statements
- A solid business plan
- Collateral (in some cases)
Banks are cautious because small businesses have a high failure rate. They want to see proof that your business is stable and can handle the payments.
MCA requirements are much looser. Providers focus mainly on your cash flow, not your credit history. If your business has steady credit card sales or bank deposits, you can often qualify even with bad credit or just a few months in business.
This easy approval is a double-edged sword. Businesses that can’t get traditional financing are often the ones least able to handle the high cost and aggressive payment schedule of an MCA.
Repayment Structure
The repayment structure is completely different between these two options.
Bank loans have monthly payments, just like a mortgage or car loan. Each payment covers some principal and some interest. You know exactly how much you’ll pay each month, which makes budgeting easier.
MCAs take payments daily or weekly, usually through automatic withdrawals from your bank account. Some MCAs take a fixed dollar amount. Others take a percentage of your credit card sales, so the payment amount changes based on how much you sell.
Daily payments can drain your cash flow fast. If your business has a slow week, you still owe the same amount (for fixed-payment MCAs) or the repayment period stretches out longer (for percentage-based MCAs). Either way, the constant withdrawals make it hard to cover other expenses like payroll, rent, and inventory.
Funding Speed
Speed is the one area where MCAs clearly win.
Bank loans take time. The application requires extensive documentation, and approval can take weeks or even months. If you need money quickly, a bank loan probably won’t help.
MCAs can fund in one to three days. The application is simple, and approval is fast because providers don’t dig as deep into your financials. For a business in a cash crunch, this speed can feel like a lifeline.
But speed comes at a price. The same lack of due diligence that makes MCAs fast also means providers don’t check whether you can actually afford the payments. Many businesses take MCAs in desperation and end up worse off than before.
Risk and Regulation
Bank loans and MCAs carry very different levels of risk.
Bank loans are heavily regulated. Lenders must follow rules about disclosure, interest rates, and collection practices. If you fall behind, there are usually processes in place before the bank can take action against you.
MCAs operate with minimal regulation because they’re technically not loans. This means:
- No caps on how much they can charge
- Contracts with one-sided terms that favor the provider
- Confessions of judgment that let providers get court judgments without notice
- Blanket UCC liens on all your business assets
- Personal guarantees that put your home and savings at risk
If you default on an MCA, the provider can freeze your bank account, seize business assets, or sue you personally. These actions can happen fast and with little warning.
Which Is Better for Your Business?
For most businesses, a bank loan is the better choice. The costs are lower, the terms are fairer, and you have more protection if something goes wrong.
If you can’t qualify for a bank loan, consider other options before turning to an MCA:
- SBA loans: Government-backed loans with competitive rates, though approval takes time
- Business line of credit: Flexible access to funds, often with easier approval than term loans
- Online lenders: Faster than banks, more expensive, but still usually cheaper than MCAs
- Business credit cards: Good for smaller, short-term needs with the option to pay over time
MCAs should only be considered as a last resort when no other financing is available and you’re confident your cash flow can handle daily payments. Even then, read the contract carefully and understand exactly what you’re agreeing to.
Already Struggling With MCA Debt?
If you took out a merchant cash advance and now can’t keep up with payments, you’re not alone. Many business owners find themselves trapped by the high costs and aggressive terms.
You have options. A debt relief attorney can review your contract, identify terms that may be unenforceable, and negotiate with the MCA provider on your behalf. In some cases, you may be able to settle for less than you owe or challenge a confession of judgment.
The worst thing you can do is ignore the problem. MCA providers move fast, and waiting gives them more time to freeze accounts or file judgments against you.
Get Help With MCA Debt
Tayne Law Group has helped business owners deal with merchant cash advance problems for over two decades. Whether you need help negotiating with an MCA provider, challenging unfair contract terms, or exploring debt relief options, we can help.
Call (866) 890-7337 for a free consultation, or fill out our short contact form. All conversations are confidential, and there’s no obligation.
Frequently Asked Questions
Is a merchant cash advance a loan?
No. Technically, an MCA is a purchase of your future sales, not a loan. This legal distinction matters because it means MCA providers don’t have to follow the same rules as traditional lenders. They can charge higher rates and include contract terms that would be illegal for loans.
Why are merchant cash advances so expensive?
MCAs are expensive because they’re designed for high-risk borrowers who can’t get traditional financing. Providers charge more to offset the risk of default. The lack of regulation also means there’s no cap on what they can charge.
Can I pay off an MCA early to save money?
No. Unlike loans where paying early reduces your interest, MCA fees are fixed from the start. You owe the same total amount whether you pay it back in two months or six months. There’s no financial benefit to paying early.
What happens if I can’t make my MCA payments?
MCA providers can take aggressive action quickly. They may freeze your bank account, enforce UCC liens to seize business assets, or use a confession of judgment to get a court ruling against you without a trial. If you signed a personal guarantee, your personal assets are also at risk.
Should I get an MCA if I can’t qualify for a bank loan?
Consider all other options first: SBA loans, online lenders, business lines of credit, or business credit cards. If an MCA is truly your only option, make sure you understand the full cost and contract terms before signing. Talk to an attorney if you have any concerns about the agreement.
