Conventional Loan vs. Revenue Advance
Though just over 20% of small businesses use conventional loans from the large banking institutions as a primary source of business funding, those are becoming harder to access. This is particularly true for small businesses and startups. As such, many small businesses are seeking alternative funding sources. Given the constant ebb and flow of consumer spending, it may be a challenge for businesses to maintain the minimum amount of collateral and pristine credit score often required by the large financial institutions.
Also, the financing process for conventional loans can drag on for months. Meanwhile, even the most well managed small business tends to need a swift uptick in capital during a seasonal slowdown. You still have employees to pay, inventory to maintain, and marketing campaigns to launch.
In contrast, a merchant cash advance — or a revenue advance — is a method of funding that is ideal for businesses who manage a high rate of return through future revenue. This is not a loan. You contract to split a percentage of your credit or debit card revenue in exchange for a lump sum advance.
The percentage of your sales can be remitted to the funding institution either daily or weekly. Keep in mind that the fees for a revenue advance may hover around 50% of the total advance. These fees are calculated using a risk factor which has a range between 1.2 and 1.5. However, the benefit of an easier qualification process is what makes a revenue advance all the more attractive of a funding solution.