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Understanding the Difference Between a Cash Advance and a Business Loan

Understanding the Difference Between a Cash Advance and a Business Loan

 

As a small-business owner in a tough economy, you want to ensure your business is as stable and profitable as possible. Statistics show more than half a million new business are started each year. Often the initial prognosis for a small business’ success is excellent. But one to five years later, the picture often looks quite different — and less rosy. One of the primary reasons promising new businesses fail is a lack of cash flow. Another reason is a lack of adequate planning for responding quickly to growth opportunities that require fast funding.Learning about two different financing options small-business owners often turn to, how they work, how to qualify and when to use each can prevent your business from failing.

Business Loan Basics

A business loan is a sum of money issued by a lender to an entity, organization or business.  The lender may be a bank, a credit union, another funding entity or an individual. Typically, the sum is fixed and comes with an attached interest rate. The interest rate may be fixed or variable and relates to when and how the sum is to be repaid. Because the business loan is still the most widely known type of small-business funding source, competition for available loans is fierce. As such, priority in allocating loan monies usually goes to businesses with high credit ratings and more established profitability projections. As well, the typical business loan application process is lengthy, requiring plenty of paperwork and a thorough review of financial documentation before the money can be released.

Business Cash Advance Basics

A business cash advance carries few of a typical business loan’s constraints. Designed for businesses in all stages of growth and development, the business cash advance is fast, flexible, simple and easy to apply for. The business cash advance is also accessible in a way a business loan to a business with bad credit will never be. With a business cash advance, struggling to find business loans with bad creditis no longer relevant. A credit check is not required because the required collateral to release funding relies solely on existing business assets,including current and future purchase orders and/or accounts receivable. Because of this, the approval process typically takes between 24 hours and seven business days. Upon approval, the cash or line of credit can be immediately advanced.

When to Apply for a Business Loan

Under certain circumstances, a traditional business loan may be the most viable option to receive funding. If your business can meet the following criteria, you have a better chance of qualifying to receive funding via a business loan:

  • Established business with a proven financial history
  • Three or more years of tax returns showing profitable operations
  • Excellent credit rating
  • Prior relationship with the bank or lender to which you are applying for funding
  • No immediate deadline by which the funds are needed
  • Time and expertise to fill out the loan paperwork and submit the application

When to Apply for a Business Cash Advance

For many small businesses, they oftenlack the business, financial and profitability history to establish the financial and credit history required to successfully competefor a bank loan. As well, often newer businesses may show a lower credit rating because all available cash reserves and other funding received is dedicated togrowing the company. For this reason,small businesses findmeeting the criteria to qualify for a business cash advance easier:

  • Access to documentation about existing (and future if applicable) credit card sales and/or outstanding or future purchase orders
  • Access to documentation about average monthly gross sales
  • Time and expertise to complete an online query form and a one-page application
  • Immediate or approaching need for a source of business funding

Thus, it is easy to see where both traditional bank loans and business cash advances fit into a small-business’ funding options. With this knowledge, youcan select the appropriate funding mechanism to get the necessary money to stabilize and grow your small business.

About the Author: Martha Reshman started a catering company out of her own kitchen. When she ran into trouble getting financing to cater a large event, she sought a business cash advance. Today, her business is strong and profitable.

Published by valentine belonwu

53 Comments

  1. Monica · May 24, 2013

    To be honest, from one side I really think that the difference is pretty hug. But when it comes to the interest rates the difference only in terms. Cash advance are usually obtained for a very short term ( 14 days and as of recently for 28 days in some states to help people in repaying their loans) while business loans are obtained for a longer period of time with a reasonably lower interest rate. Chances are very high that in the end of the deal the interst might appear approximately the same.
    Monica from [email protected] Company

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