Credit Cards vs. Merchant Cash Advances | Fora Financial Blog
Should You Apply for a Business Credit Card or Merchant Cash Advance?
June 27, 2018

Should You Apply for a Business Credit Card or Merchant Cash Advance?

If you need additional business financing but don’t have a good credit score, a business loan might be out of reach. Don’t worry if you’ve been denied, though; you still have funding options. For example, you could qualify for merchant cash advances or credit cards, which are also viable financing options. With these financing products, you can meet your capital needs without a stellar credit score.

Merchant cash advances and credit cards operate differently, but give you an immediate source of money. In most cases, this money will come with no caveats, and you’ll be free to use it anyway you wish. Still, you’ll need to determine which option is right for your business. A little research is needed, so here’s an introduction to the differences between merchant cash advances and credit cards.

What Are Business Credit Cards?

A business credit card works like a personal one; you’ll get access to a certain amount of unsecured credit (with limits sometimes as high as $50,000) and must pay back what you spend at the end of each billing cycle. In addition, you’ll get an annual percentage rate (APR), which only comes into play if you carry a balance on your card each month. The APR on business cards is usually lower than personal cards, with the national average around 14 percent. To calculate what you’ll pay in interest, divide your APR by 365 to get the daily rate and multiply that by the balance on the card.

Applying for a business credit card is simple. You’ll need all the information required on a personal credit card application, plus annual revenue documentation. Just starting your business? You can still get a business credit card if you have a good personal income stream and a high credit score. Still, it’s important to note that if you can’t pay off your business cards, your creditors will come after your personal assets.

Business credit cards have some great perks, including discounts on Internet and phone services, and even free hotel stays. The cash back and airline mile rewards programs are more generous than personal credit cards too, but annual fees are common. Still, these perks provide lots of business value.

What Are Merchant Cash Advances?

A merchant cash advance is another way to provide funding for your business, but they don’t work in the same manner as credit cards. While a credit card is basically a one-month loan from a bank, a merchant cash advance has an agreement that the lender will receive a portion of the business’s future sales. This means you’ll be remitting a portion of your credit card sales, usually on a daily or weekly basis. To apply, you’ll typically need to supply three months of credit card statements to show the provider you’re capable of remitting the advance.

Factor Rating vs Annual Percentage Rate

A merchant cash advance uses a factor rating instead of APR, because the interest isn’t recalculated over time. If you take a $20,000 cash advance with a factor rating of 1.2, you’ll be remitting $24,000 in total, or 30 percent interest.

Cash advance remittance can fluctuate based on your business sales. If your restaurant makes $12,000 in credit card sales each month and you agree to remit 12 percent back to the cash advance provider, your daily remittance will be $48 for almost 17 months.

Which Option Is Right for Your Business?

Credit cards and merchant cash advances can be beneficial options for businesses that are unable to get approved for traditional funding. If you know you’ll have the funds to pay back your credit card each month, it might make sense to go this route. You’ll avoid finance charges, and will only have to pay the annual fee. In exchange, you’ll enjoy perks like discounts and airline miles.

For cash advances, factor rating is the important aspect. If your rating is reasonable, you won’t have trouble fulfilling your obligations. Because remittance is based on a percentage of your sales, you won’t have to worry about minimum payments either. If you apply, be sure to read all the paperwork and confirm that it’s the right fit for your business.

Has your small business utilized credit cards or cash advances? Tell us about your experience in the comment section below.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].