In the alternative lending marketplace, it can be difficult for a business to decide which source of lending is best suited for its short term and long term needs. For instance, it can be quite difficult for a business to decide which one of a merchant cash advance and an ACH advance is the right option. The reason for this difficulty lies in the fact that an MCA loan and an ACH loan have so many similarities. It is important therefore for a business to have ample knowledge of the two lending options to make the right decision.
What is the meaning of an ACH or Cash Flow Loan?
The ACH loan is one of the most innovative products that are available in the alternative lending industry and probably only second to merchant cash advance regarding flexibility. An ACH advance as it is sometimes called represents a broad category of business loans that are specific in the way they are back, much like merchant cash advance. One of the core differences between the ACH advance and a merchant cash advance lies in the definition itself. ACH is an acronym for automated clearing house. From this, we gather that it is a form loan in which the amount to be repaid is automatically withdrawn from the account of the business.
How is a Cash Flow Loan different from a merchant cash advance?
This definition might not do much to differentiate it from merchant cash advance in that it is possible for certain merchant cash transactions to involve payback processes that use ACH. However, other differences between a merchant cash advance and an ACH loan will be explored. One area in which the automated clearing house loan is different from a merchant cash advance is in the frequency of the repayment. In the case of merchant cash advance, the business has to make payments to the merchant cash advance on a daily basis.
But for an ACH loan, payments could be made on daily, weekly or even a monthly basis depending on the agreement that was reached with the lender. One way in which an MCA and an ACH advance different from term loans is that instead of the business having to make payments to the bank, for instance, the money is drawn from the business automatically. In most cases, the repayment of a merchant cash advance is done through batch splitting. Batch splitting is a method of repayment in which the business gives authorization to its processor to transfer the agreed portion of the daily credit card sales to the merchant cash advance lender.
Is the amount that is paid in ACH Advance fixed or variable?
One other area in which merchant cash differs from an ACH loan is in the amount that the borrowing business is made to pay. This difference is, in reality, an area of the superiority of a merchant cash advance over an ACH advance. In the case of a merchant cash advance, a business is required to pay a fixed percentage of its daily credit sales to the merchant cash advance provider. What this means that the business under this arrangement is less likely to suffer strain to its cash flow.
Benefits of a variable repayment amount
One way to put this is that business gets to pay more when its sales are high and less when its sales are low. Another implication of this is that unlike an ACH loan, there is no fixed period during which a merchant cash advance has to be repaid. The higher the revenue the business, the higher it pays to the merchant cash advance and the sooner the advance is repaid. In any case, there are no penalties for late payments in a merchant cash advance.
In contrast, however, an ACH advance requires that a business pays a fixed at the agreed interval. Although some might argue that this means that the debt would be repaid earlier that it would, were it a merchant cash advance, it has the effect of straining the cash flow of a business. Of course, it can also be said that such predictability in the repayment of an ACH loan could help the business manages its cash flow. Be that as it may, a merchant cash advance remains the option that is more suited for the stability of small businesses.
Benefits of Merchant Cash Advance and ACH advance
There are certain benefits that can be obtained from an ACH loan as well as a merchant cash advance. The most significant thing about the lending options is that they make funds available to businesses more quickly than traditional lending sources can. Just as it is an ACH advance, a merchant cash advance could take a matter of days to be processed.
In the same way, there is no collateral requirement for a merchant cash advance; there is no need for collateral for ACH Advances. In fact, in both lending options, the business does not have a good credit score before it can be considered for funding. In spite of all the similarities between a merchant cash advance and an ACH loan, there are certain reasons a business should opt for a merchant cash advance instead of an ACH advance.
Why business should opt for merchant cash advance
There are at least two important reasons a business should opt for a merchant cash advance ahead of a cash flow loan. One is that a merchant cash advance offers a repayment schedule that involves a variable amount which as does not strain cash flow. The other is that merchant cash has greater control over the repayment process in using batch splitting rather than ACH. The final reason a business would give more thought to merchant cash advance is that it is probably the only lending option where the business cannot be held [personal responsible for repaying the loan if the business fails. All of these additional benefits of merchant cash advance give it an edge over an ACH loan.