Choosing Between SBA Loans and Merchant Cash Advance

For most businesses, finding the right kind of financing, that is, one that best suits the peculiarities of the business in question can be something of a challenge. While there a numerous sources of business funding nowadays it is important for a business to make the right decision in choosing what business lender to partner with as making the wrong decision in this regard can put the business in jeopardy. In view of this, we wish to discuss two of the most common sources of business funding: SBA loans and Merchant Cash Advance. The overall aim is to enable a small business owner to make an informed decision in which of the two sources of business finance best suits the business needs. SBA loans can be used to finance working capital, equipment purchase, construction, and even to finance other debts.

What is an SBA Loan and what are some of the Misconceptions surrounding it?

The small business administration (SBA),  in its effort to enable small businesses to gain ready access to business credit embarked on a program which resulted in what is known today as SBA loans.  In reality, the small business administration does not grant loans to small businesses—at least not directly. What the SBA does instead is to act as a guarantor for small businesses seeking loans from commercial banks and other traditional financial institutions. The guarantee enables more and more lenders to offer loans to small businesses including startups since the SBA has pledged to repay the loan, should a business default. Such loans for which the SBA provide guarantee are known as SBA loans—and in most cases, the SBA provides coverage for as much as 80 percent of the entire loan. This means whenever it is said that a business applied for an SBA loan, what is meant is that the business applied for a conventional business loan from a commercial bank which has been backed by the small business administration.

What kind of financial institutions are involved in SBA Loans

Getting an SBA backed loan is not just a question of walking into a commercial bank and some other financing institution and requesting an SBA backed loan. Indeed not all small business lenders offer SBA financing because not all of them would meet the general criteria set down by the small business administration. A partner institution in the SBA program is expected to meet some general criteria. First, the bank or so must have had adequate experience by having to be in operation for at least 10 years. The bank is also expected to show a record of few small business loans bought back by the SBA. One other criterion is that bank must demonstrate what is called community lending, that is, lending to minority groups such as blacks, and also to women before it can participate in the SBA loans program. Above all the institution must show proof of having been offering loans to small business in the past at reasonable terms. Be that as it may, lenders who partner with the SBA usually belong to one of three categories.

The two groups of partners

The first group of lenders who partner with the small business administration is the infrequent participant lenders as they are called.  These are banks and nonbank financial institutions that offer SBA loans on a not too regular basis—off and on. Lenders in this group usually receive a request for a loan from small businesses and after examining the documents forwards them to the SBA for review of the particular loan situation to see if it will offer a guarantee. It is then the job of the small business administration to do an independent analysis of the loan application to determine if it is such for which it can offer a guarantee.

The second group of lenders is those of the certified lenders—certified by the SBA. Certified lenders are financial institutions that participate regularly in the SBA loan program. Because they are certified the lender analyses the loan application and determines if the business is eligible for a loan or not. However, it is the SBA that gives the final word on the guarantee and usually does so within three business days. The last groups are the preferred lenders. These are actually certified lenders that have shown excellence over the years in working with the SBA. The small business empowers them to give the final word on SBA loans as result of their track record. Banks that are preferred lenders are known to have special SBA units in their banks for handling all SBA related matters.

Understanding Merchant Cash Advance

A merchant cash advance is somewhat similar to a loan but is not a loan in the traditional sense of the word. Because a cash advance is not a loan, regulations that govern loan transaction between commercial banks, for instance, and business do not apply. In short, the entire MCA industry is unregulated and there is no federal oversight. A merchant cash advance is seen as a commercial transaction between two businesses and as such, it is the laws that govern business to business relationships that apply. All this is not to say that everything goes in an MCA transaction for such laws as the fair reporting act as well as the uniform commercial code in each state applies. Unlike SBA loans merchant cash advance is a transaction in which the lending institution provides a lump sum of cash to the business which it hopes to recover from the future credit card sales of the business. Because a merchant cash advance transaction is structured as a sale it does attract interest, but this does not imply that merchant cash advance providers do not make a profit. Of course, they do. By employing the method of factoring, businesses are made to pay a little higher than the amount was borrowed in order to generate a profit margin for the merchant cash advance providers.

How does merchant cash advance work?

Having differentiated between an SBA loan and a cash advance, it is necessary to understand what merchant funding as all about. The first thing to know is that a business is usually entitled to cash advance if it has a monthly credit card volume of at least $10,000. If this requirement is met and the decision to offer an advance is made by the merchant cash vendor, then in a matter of days the whole transaction shall have been completed.  The amount which the business requests for is, as a matter of standard practice, multiplied by a certain factor in order to arrive at the total amount payable by the business. The next thing that occurs is that a certain percentage— often 15 to 25%–of the credit card sales of the business is remitted on a daily basis to the firm.  This process continues until the entire amount has been repaid.  There are two major payment options which a business can choose from in order to determine what goes to merchant vendor on a daily basis: the fixed amount or the fixed percentage method. In the first instance, a fixed amount is paid on a daily basis to the merchant cash advance provider regardless of what the business conditions are; while in the fixed percentage method it is the percentage that is fixed and not the amount. In this method the payment is made to vary with business conditions, that is, when sales rise more is paid and when sales drop less is paid.

Areas in which a merchant cash advance is superior to an SBA Loan


The process of obtaining an SBA loan is very complex. In fact, it is even more complicated than the conventional bank loan since it has to be approved at two levels: first by the lender and second, by the SBA. It is well known that an SBA loan could take several months to process and this is in stark contrast to what obtains in a merchant cash advance. A merchant cash advance can take less than a week to process from start to finish. When it comes to speed, loans, in general, are no match for a merchant cash advance.


SBA backed loans require collateral, unlike a merchant cash advance which is an unsecured loan. Although a business that has successfully obtained an SBA loan does not have to forfeit its collateral since their loan is backed, the collateral requirement in the first phase of getting the approval of the financing institution is where the difficulty lies. In a merchant cash advance, there is no risk of personal loss to the business since the merchant cash provider bears all the risk.

Approval rate and documentation

More than 50 percent of all loan applications be it SBA or not it will end up being rejected according to recent studies. This means that in spite of the effort and time that is put into applying for an SBA loan it is likely to be turned down. This doesn’t sound like good news especially for businesses in urgent need of cash. In contrast, the approval rate is extremely high for merchant cash advance as nearly all who qualify to obtain the loans.


Merchant cash advance, although quite more expensive than SBA loans, seems to be a better option when one looks at the ease and speed with which it can be obtained. Indeed, the benefits of MCA funding for small businesses cannot be overemphasized and more business owners are beginning to appreciate its value.

By | 2017-12-28T06:55:02+00:00 December 26th, 2017|Business Loan|