Term loans vs MCA vs lines of credit

Start from the need, not the product

Brokers who only place advances tend to see every merchant as an advance. A broker who places several products asks two questions first: what is the money for, and what does the file look like? A bakery replacing an oven, a contractor covering payroll between progress payments and a restaurant buying its building need different products, even if the owner says the same thing on the phone: "I need $100,000."

The decision table

Typical patterns, not rules. Every lender and program differs.
	Merchant cash advance	Term loan (non-SBA)	Line of credit	SBA loan
Speed to fund	Often days once documents are in	Days (online lenders) to weeks (banks)	Days to weeks to open; draws fast after	Weeks to months
Cost	Highest; priced as a factor rate	Moderate; priced as an interest rate	Interest only on what is drawn, plus fees	Usually lowest; rates set within SBA limits
Documentation	Application, recent bank statements, ID	Statements plus tax returns and financials	Similar to a term loan; reviewed again at renewal	The most: tax returns, financial statements, debt schedule, SBA forms
Credit	Flexible; cash flow matters most	Moderate to strong personal and business credit	Moderate to strong	Strong; also time in business and ability to repay
Repayment	Daily or weekly remittance until the purchased amount is delivered	Fixed payments of principal and interest over a set term	Pay down and redraw; minimum payments on the balance	Long-term fixed payments, often monthly
Collateral	Usually a UCC-1 on receivables and a performance guaranty	Often a lien on business assets and a personal guaranty	Often a lien on business assets	Business assets, sometimes real estate, and guaranties
Best for	Fast, short-term needs; files banks will not take	A defined project with a payback plan	Uneven cash flow and recurring short gaps	Real estate, acquisitions, long-term growth

Compare in dollars and months

Factor rates and interest rates do not compare directly. Put both in dollars over their real time frames. Two made-up offers for the same $100,000 need:

MCA:       $100,000 x 1.30 factor = $130,000 payback over about 8 months; cost $30,000
Term loan: $100,000 at 12% a year for 24 months, monthly payment $4,707.35
           total paid $4,707.35 x 24 = $112,976.40; interest about $12,976

Loan payment from the standard amortization formula (see the equipment lesson).

The loan costs less than half as much in dollars, but it takes 24 months of payments and asks for tax returns and stronger credit. The advance is far more expensive, and it may be the only option for a merchant with eight months in business and a 580 score. Your job is to know which merchant you are talking to.

Quick rules of thumb

Two or more years in business, filed tax returns showing a profit and good credit: shop term loans and lines before an advance.
Buying a specific machine or vehicle: look at equipment financing first; the asset secures it.
Buying real estate, a business or refinancing long-term debt, with time to wait: consider SBA.
Seasonal or lumpy cash flow with repeated short gaps: a line of credit.
Needs money this week, thin file or existing positions: an advance may be the realistic product; present its cost plainly.

How the CRM helps

In Ferrylend, each deal has a Product (MCA, SBA 7(a), SBA Express, SBA 504, line of credit, term loan, equipment finance, invoice factoring or revenue-based financing) next to its Deal type (new, renewal, add-on, consolidation). Each lender program carries a product too, and lender matching only checks a deal against programs of its own product. The deal's Application tab shows the fields that product needs, and offers are priced by product: a term or SBA loan by rate, term and amortization, a line of credit by its draw, an advance by its factor. Offers of different products then compare side by side on net to the merchant, total cost, monthly payment, term and an APR estimate. See CRM for business loan brokers.

Questions

Is a merchant cash advance more expensive than a term loan?

Usually, yes, when you compare total dollars of cost for the same amount. A term loan needs stronger credit, more paperwork and more time, so an advance is sometimes the only realistic option. Compare offers in dollars and months, not factor rate against interest rate.

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