It is very obvious that a business owner who is in need of finance would seek financial support from banks and other sources of financing. As we all know, there are numerous options when we talk about loans as new schemes of financial assistance are being introduced every year.
It becomes difficult for the business owners to differentiate one loan from another. The two most common types of loans available in the market are MCA (merchant cash advance) and an installment loan. However, MCA is not exactly a form of the loan, but it has become a part of the discussion as it offers all the benefits that a traditional loan offers.
What is an installment loan?
This is not a new concept introduced in the market. Loan providers have been offering financial assistance to the customers for the past 100 years. The customers can use such financial support for buying services and goods. Certain lenders of the installment loan operate online whereas there are some who offer offline services.
These loans are given to the consumers, and the maximum limit of such type of loans is 5000 dollars. The lenders of the installment loan are recognized by both the state as well as federal government. The loan so offered is bound to be repaid in the form of monthly installments. The structure of this installment loan makes it different from the loans offered by traditional banks and financial institutions.
Some common features of installment loan
The providers of the installment loan agree with such borrowers whom they think can repay the loan acquired. The analysis of the creditworthiness of a borrower is done by his or her monthly expenditures and incomes. They analyze whether there is any money remaining after meeting with all the expenses that can be used in the repayment of loans.
The repayment procedure of installment loan is very different from the financial institutions as it is repaid only if the customer borrowing it has excesses, which is the leftover money after making all the expenses. The lender does not grant the loan unless he is fully satisfied with the potential customer. Another great thing about an installment loan is that the customer is not charged with any penalties if he or she makes the prepayments.
How is an installment loan so distinct from a payday loan?
Some people think that an installment loan is no different from per day loan. A payday loan is an old type of financing generally opted by people belonging to the working class. It is a type of cash advance that has personal check security. Under this type of loan, the lender has the authority of making electronic transmissions from the checking account of the borrower. Some of the similarities in the payday and installment loan are that both of these loans are short-term, the loan amount is generally small, and their purpose is also the same.
There are certain differences as well. Unlike an installment loan, the money lender asks the borrower to give him access to his or her checking account for encashing the money at the time of paying back. A customer is required to give a post-dated check to the providers of payday loans. Underwriting of loans is not done by the payday loan providers as the creditworthiness of the customer is proved by check. So, this is how installment loan is different from payday and other types of loans.
Introduction to MCA
Dissimilar to an installment loan, an MCA is a financial aid that is provided to business merchants instead of individuals. Providing an MCA to the business persons is a commercial transaction in which two parties are involved, namely MCA provider and a business owner. An MCA can be used for purchasing equipment or machinery, for making repairs, and for extending the business.
Under this type of scheme of offering a loan, a businessperson sells a fixed percentage of future credit card sales of the business to obtain financial support from the MCA providers. There is no interest amount required to be paid when a merchant acquires an MCA. The amount of cash advance provided by MCA providers to the business is going to hold a lot more value in the future when it will become debt-free, which later on results in factoring under the agreement of merchant cash advance.
Key terms of MCA
A merchant cash advance includes some terms which are not a part of an installment loan. One of the things is the factor rate. It is the rate or amount that gets multiplied by the amount of cash advance for determining the value of the total payback amount. This rate gets determined by the amount of cash advance, the type of business, and any other factor that the MCA provider chooses.
The amount withheld is a part of the regular credit card sales that will be included in the payback amount. It can either be a fixed amount or a percentage, which is generally between 20-40 percent with flexibility. If the sales are high, then the amount paid is higher, and if they are less, then the amount paid is less.
So, that is all you need to know about merchant cash advance and an installment loan. An installment loan is more like a private loan whereas an MCA is a cash advance offered to business owners for meeting the daily requirements of the small business.
Both of these options of obtaining financial assistance are great. If you need financial help of small amounts, then you can reach out to the lenders of installment loans, but if you are a small business owner in the immediate needs of funds, then the best option for you is to take financial help from the providers of a merchant cash advance. If you are a business owner, then it is advisable for you to not to opt for an installment loan.