Is a SBA Loan Better Than a Cash Advance?
In short: yes. And its not even close. Business loans administered through the Small Business Administration offer companies among the most affordable debt financing facilities available to small firms. Merchant cash advances, on the other hand, are on the opposite side of affordability and are structured completely different than SBA loans. In fact, the two are hardly comparable considering SBA financing is true APR loans, while merchant cash advances aren’t loans at all, but are instead the sale of the small business’s future receivables to a funding company – not a lender. Merchant cash advance funding companies aren’t trying to complete with SBA lenders because the credit profile each lender is looking for is completely different. SBA lenders aren’t looking to take much or any risk at all (which is the point of the SBA program, as we’ll get into further below) while a merchant cash advance funding company takes extraordinary risk.
First, to understand how Small Business Administration loans are superior to business cash advance funding, you need to understand what each type of financing is, and what they entail.
Small Business Administration enhanced business loans aren’t actually originated by the U.S. government. Instead, the loans are originated by conventional banks, credit unions and non-profit lenders. What makes SBA loans different than a conventional bank business loan is the fact that the SBA agrees to cover a large portion of the loan in case the borrower is unable to fully-repay their SBA loan. Should the borrower default on the loan, the U.S. government will step in and much of the lender’s losses. By providing this backstop by the SBA, the hope is that it will encourage more lenders offering bank-rates to provide lending options to small businesses that are healthy, but are unable to get approved for a conventional loan.
Merchant Cash Advances:
As mentioned previously, a merchant cash advance isn’t a loan at all. A cash advance is instead a business-to-business transaction that involves the small company selling a portion of its future earnings, receivables, bank deposits or credit card processing transaction to a cash advance funding company. Cash advances are generally short term in nature, with most advances having repayment plans that are under a year.
SBA vs MCA
|SBA||6-10%||3-7 years||10-30 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
How is a SBA Loan Better Than a Cash Advance?
- 1. Rates: Since SBA loans are true bank loans they also offer true-bank rates. The SBA doesn’t set the rate of a SBA loan, but they do put a maximum markup on how much the SBA lender can add to the rate. Generally, the maximum rate for a SBA loan is around 8.5% (with the overwhelming majority of SBA 7(a) and 504 loans having rates under 6.5%.
- 2. Terms: SBA loans have superior terms and the loans are fully-amortizing. General use SBA loans have terms that begin at 3 years, and can last as long as 25 years if the loan proceeds are being used to purchase or refinance commercial real estate in which the business occupies 51% of the property.
- 3. Fees: Sometimes fees associated with SBA loans may be substantial at times, but are generally much less than you’ll see with many merchant cash advances and other alternative business lenders.
- Debt Service: Since SBA loans offer small businesses low rates with extended terms (that involves monthly payments) a company is much more likely to be able to handle these debt payments than with a high interest loan that has short terms. In fact, a merchant cash advance almost always involves a repayment schedule that requires the small business to make daily repayments to the lender (although, on occasion, they may be able to get weekly payments).
- Additional Funding Options: SBA loan are always 1st position loans (meaning that the lender will only provide the loan if they can place a lien on the small business that puts them in a senior position to go after business assets should the borrower default). This allows the company to seek additional funding options should a need arise.
- Healthy Financing: SBA loans set a company up for success by providing affordable financing. Since the terms and amortizations are extended, this allows the SBA lender to provide the small business a larger funding amount, since they will be able to service the debt over a longer period.
When is a Merchant Cash Advance Better Than SBA Financing?
- 1. Speed of funding: Merchant cash advances fund extremely quickly, whereas a SBA loan can take months to complete. Cash advance funding companies require minimal documentation to get approved (credit application and bank statements) and require few other documents to complete the underwriting process. After approval a small business can expect funding to occur within days – sometimes even the same day.
- 2. Credit Requirement: SBA lenders generally require a credit score of, at least, 650, with many SBA lenders only approving loan requests from borrowers with credit scores near 700. With a cash advance, many funding companies will approve loans with credit scores as low as 500. And while SBA lenders will require borrowers to show a debt service coverage ratio of 1.1 or better, a cash advance lender is more concerned about total cash-flow through the small business’s bank accounts and credit card processing accounts.
- 3. Personal Financial Requirements: Small Business Administration loans require the owner of the company to not only personally guarantee the SBA loan, but also provide a personal financial statement that shows they have a net worth that is the same as the total SBA funding amount. With a merchant cash advance there is no such requirement. No personal financial documents are needed to get approved for a business cash advance, nor does the borrower have to provide a personal financial statement proving net worth.
- 4. No collateral: An advantage for merchant cash advances over SBA loans is the fact that collateral isn’t required to get funded. SBA loans usually require the borrower to pledge substantial personal collateral like personal real estate in order to get funded. Even more, the SBA lender generally likes to see substantial business collateral in order to get approved for a loan. Merchant cash advances, on the other hand, don’t require any collateral to get funded. This doesn’t mean that a lien isn’t placed on the business, because it usually is. And since the lien is a blanket lien, all general business assets are being pledged. But a specific amount of collateral isn’t required as with SBA loans.
While there are some benefits to a merchant cash advance (primarily speed and reduced credit requirements) a SBA loan is almost always the best funding option for any small business – no matter what the need is.