It isn’t always easy to qualify for a bank loan. Banks have strict rules for handling these loans, plus you might not have enough credit data to get the funds you need. You can utilize a merchant or ACH advance if you have struggled to try and get a loan from a bank.
Your advance will provide you the funds necessary for many operations. You can use these funds to hire new workers, purchase new equipment, or restore your business inventory. You will have limits over what you can do with your funds after you receive them through an advance provider.
But these two lending options are different from one another. Here’s a look at what makes these two lending choices distinct.
How a Merchant Cash Advance Works
First, let’s look at a merchant cash advance or MCA. You will sell a part of your future credit card receipts to a buyer. The buyer will provide funds based on what you request. You will then pay those funds back through the credit card transactions you complete. The buyer will collect a percentage of whatever you earn each day and continue doing this until you have completely paid off the advance total and all associated fees.
How an ACH Advance Works
The second option to see is an Automated Clearing House or ACH advance. It works like a merchant cash advance, but an ACH advance works with your bank account deposits. The provider will offer funds based on your bank statements, including your cash flow.
An ACH is ideal for those who don’t accept credit cards. People who collect credit card payments could also consider this, although an MCA would be better suited for that occasion.
An MCA will require an analysis of your business’ credit card transactions. The buyer will offer funds based on how well your business can bring in funds.
An ACH advance provides funds based on your bank account deposits. Your bank statements and cash flow reports can also determine how much you will receive. You may not qualify for as much money, especially since you might not bring in as much as you would if you took in more credit card payments.
In an MCA, you will pay off the advance total through an agreement you establish with the buyer. You will offer a percentage of your daily credit card sales totals to the buyer. You could plan a split withholding effort where your credit processor will divide the funds between you and the buyer, or you could have your funds enter a bank account that the advance provider controls. In that latter case, the buyer will send you your share of the funds after taking out a percentage of whatever you utilize.
An ACH advance entails the buyer deducting funds from your bank account. The buyer can remove the proper amount of funds every day or week.
How Much Do You Pay?
An MCA will let you pay a varying amount each day. You can establish a percentage for how much of your credit card receipts you will send to the buyer each day.
An ACH advance requires you to plan a fixed payment each day or week. The payment effort offers predictability, but you might experience a restricted cash flow if you cannot bring in enough funds.
How Long Does It Last?
You will have more flexibility in paying off an MCA than if you had an ACH advance. A merchant cash advance gives you varying times for paying off the funds. You could deal with a dry period in sales, and you would still be capable of paying off the MCA because you are not being pressured into anything you cannot handle.
An ACH advance is different, as you would have an established time for paying everything back. You can state you want to pay back the advance in a few months.
What Fees Work Here?
Both advance options include similar fee structures. You would spend extra on your advance through a factor rate. The rate means you will be charged a percentage of whatever you borrow.
What Is the Approval Rate?
The approval rate for an MCA is greater than what you’d get from an ACH advance. An MCA is easier to handle because a buyer will know the business has a plan for bringing in funds. The buyer will allow the advance to work if it knows a business has enough credit card receipts.
An ACH advance is tougher to predict, as there are no guarantees someone will get the funds one needs. Most businesses that apply for ACH advances don’t accept credit cards, or they may not accept as many card types as a traditional business. The lack of support for cards could make it harder for a business to complete some sales, especially as people start flocking towards cashless payment solutions. Therefore, you would have an easier time being approved for a merchant cash advance than if you stuck with an ACH advance.
Which Option Should You Consider the Most?
The best way to figure out what you should do is to review your business operations. A merchant cash advance is best if you experience fluctuations in how much money your business brings in, plus it works if you accept credit cards.
Meanwhile, an ACH advance is better if you don’t accept card payments or you don’t take them as often. An ACH advance will also work if you have a consistent amount of money entering your business. You’ll need that regular flow to ensure you can afford the set payments necessary for the work at hand.
Be sure to review these two options and figure out how your business operates to see what fits your business needs. A merchant cash advance or ACH advance will provide you the funds you need for all your general operations. But be certain when finding an advance you know what you’re getting from your plan.