One of the most significant decisions that new businesses face today is where and how to receive additional working capital during the initial period or tough times. While having access to conventional bank lending is excellent, it is just not realistic in the world anymore.
This is because of several circumstances: many businesses with weaker credit profiles resort to alternative measures to obtain working capital quickly and without much hassle, low approval rates of banks, etc.
But, even in the alternative lending marketplace, it can get difficult for a company to decide which type of lending is best suited for its short and long-term needs. Should they opt for a merchant cash advance or an ACH loan? The reason why choosing between these two is so difficult is because of so many similarities. Therefore, businesses need to have ample knowledge before making the decision.
What are ACH loans?
ACH loan, or cash flow loan, is an alternative lending solution that comes second only to merchant cash advances when it comes to flexibility. It works exactly like a merchant cash advance. However, there is one core difference: while you have to pay on a daily basis in merchant cash advance, the ACH loan allows you to pay on a daily, weekly, or monthly basis.
ACH loan is an electronic funds transfer network that processes credit and debit transactions. Banking ACH transactions can be set up as one-time payments or as recurring payments. The ACH network batch processes ACH transactions that financial institutions and banking accumulate through a business day. All the processes are done electronically, thereby speeding up the process and settlements on the same day.
The dominant trait that ACH loan has with merchant cash advance is that the repayment process is automatic. However, there are also some differences that make businesses prefer merchant cash advance more than ACH loans.
- There is no need to remember to make payments
- More comfortable to track payments since the payee names appear on your financial software or bank statement
- There is no need to wait for the postal service to deliver payments
- There is no need to write checks
- A person has to hand over details like his or her bank account number.
- An error can accidentally lead to a person paying more than he or she ought to; such errors can drain the person’s account and cause him or her to rack up fees and bounce other payments.
- The borrower could overdraw his/her account if they do not keep enough money available in checking.
- There is a chance that the borrower might forget what he/she is paying for if they do not see the bills.
What is merchant cash advance?
Merchant cash advance is a form of business that is very different from ACH loan. ACH loans bear much resemblance to term loans. MCA is merely a purchase of future receivables of the business in exchange for a lump sum of cash.
Primarily, the business sells a percentage of its credit card sales to the MCA provider. Unlike ACH advance, merchants do not get debited automatically by the lender in MCA transactions. What happens is that the business authorizes its processor to make payments to the lender until the payment has been cleared.
There are two most important advantages of merchant cash advance. First is that the business does not have to pay a high fixed payment on a monthly basis. Instead, an agreed percentage of the daily credit or debit card sales are collected. The second significant advantage is that businesses with poor credit ratings can apply for a merchant cash advance loan. Even the approval of the advance does not take more than a few days. Other advantages include:
- Does not require any collateral
- The business is free to use the capital however it sees fit
- Unlike ACH loan, a person doesn’t have to write a check to pay back the advance every month
- There are no other hidden costs
What is the difference between the two?
One area in which ACH loan is different from merchant cash advance is the amount of money that the business has to repay. An area of superiority for merchant cash advances, the business has to pay a fixed percentage of sales to the MCA providers. This implies that the business is less likely to suffer strain to its cash flow. There is also no fixed period to repayment in a merchant cash advance, unlike ACH loan. The higher the revenue, the quicker the advance is paid back.
In contrast, an ACH loan requires the company to pay a fixed amount at the agreed interval. This can hurt the business and strain the cash flow. Hence, in such cases, a merchant cash advance seems best for the stability of new or small businesses.
Why is MCA better than ACH loans?
Primarily, there are two reasons why a business should opt for merchant cash advance instead of an ACH loan. Merchant cash advance offers a repayment schedule that involves a variable amount and does not strain the company’s cash flow as discussed above. The other reason is that merchant cash advance has greater control over repayment process in using batch splitting rather than an ACH loan.
Lastly, the final reason is that merchant cash advance is the only lending option where the company cannot be held responsible for repaying the loan if the business fails. These benefits of merchant cash advance give it an edge over ACH loans.
The above advantages make merchant cash advances the leaders of the alternative lending industry. Their success can be attributed to the fact that small businesses can meet their lending needs through merchant cash advances. The sole fact that many small businesses have thrived and survived because MCA automatically makes it the best lending solution.
Small businesses are gravitating towards merchant cash advance lenders because this form of lending is much more reliable and secure to procure. These lenders are capable of filling the gaps created by traditional lenders and might one day become the first lending choice for businesses.