How Does the Approval Process for a Merchant Cash Advance Differ from Traditional Bank Loans?
When it comes to securing a business loan, the approval processes for a Merchant Cash Advance (MCA) and a traditional bank loan can vary significantly. In this article, we will explore the key differences in documentation requirements, credit score considerations, approval timeframe, repayment structure, and collateral requirements. Understanding these variances can help business owners choose the most suitable financing solution for their needs.
Documentation Requirements
MCA: The documentation requirements for an MCA are typically less stringent compared to traditional bank loans. MCA providers usually request basic documentation such as bank statements, credit card processing statements, and proof of business ownership.
Traditional Bank Loans: Traditional bank loans often require extensive documentation, including business and personal tax returns, financial statements, business plans, collateral documentation, and credit history reports. The application process for a bank loan can be time-consuming and complex due to the thorough documentation required.
Credit Score Consideration
MCA: While MCA providers may consider the business owner's credit score, it is not the primary factor in the approval decision. MCA approval is primarily based on the business's revenue and sales history, making it possible for businesses with less-than-perfect credit to qualify for funding.
Traditional Bank Loans: Banks place significant emphasis on the borrower's creditworthiness when evaluating loan applications. A high credit score is often a prerequisite for approval, and borrowers with poor credit may struggle to qualify for traditional bank loans.
One of my acquaintances who had a cafe in the sunshine state told us in r/MCALegends that she needed to scale her cafe but was constantly being rejected by banks when she applied for loans. Why? She never bought things on credit and so her credit history was non-existent. Some of our readers advised her to seek a suitable MCA lender, and voila! She got the required funding within days.
Approval Timeframe
MCA: The approval process for an MCA is typically much faster than traditional bank loans. MCA applications can be processed and approved within days, with funds disbursed shortly thereafter. This quick turnaround time makes MCAs ideal for businesses facing urgent financial needs or cash flow challenges.
Traditional Bank Loans: The approval process for traditional bank loans can take weeks or even months to complete. Banks conduct thorough due diligence, including credit checks, financial analysis, and collateral evaluation, which contributes to the longer approval timeframe.
Repayment Structure
MCA: Repayment of an MCA is based on a percentage of the business's daily credit card sales or a fixed daily or weekly amount. This flexible repayment structure aligns with the business's cash flow and revenue cycles, making it easier to manage.
Traditional Bank Loans: Traditional bank loans typically have fixed monthly payments over a predetermined term. While the repayment schedule may be predictable, it can be challenging for businesses with fluctuating cash flow to meet monthly payment obligations consistently.
Collateral Requirements
MCA: MCAs are unsecured financing, meaning they do not require collateral. Businesses can access funding based on their revenue and sales history without pledging assets as security.
Traditional Bank Loans: Traditional bank loans often require collateral to secure the loan, such as real estate, equipment, or inventory. Collateral provides assurance to the lender and reduces the risk of default for the bank.
By understanding these differences, business owners can choose the financing option that best suits their needs and financial situation. While traditional bank loans offer long-term financing with lower interest rates, merchant cash advances provide fast and flexible funding solutions for businesses with urgent funding needs or limited credit options.