To understand what makes a merchant cash advance unique, it helps to understand your basic term loan.
Term loans encompass a variety of forms of lending. Short-term and long-term loans both qualify, as do equipment loans, and several types of government-backed SBA loans. While there are a few distinct differences between these forms of lending, like whether any asset is held as collateral, they all function the same way.
Each of these financing options involves a borrower applying to a financial institution. That institution then evaluates the creditworthiness of the potential borrower and determines an appropriate loan size, interest rate, and repayment term. This process can take weeks or even months, and qualifying for a large bank loan can be difficult.
Lenders receive information about potential borrowers through credit bureaus, which use that company’s credit history to determine a business credit score. The theory is that the higher a business’s credit score, the more likely that business is to repay its debts.
If approved, the borrower receives the entire lump sum at once and makes monthly payments until the loan is paid back in full, plus the agreed-upon interest rate. Those monthly payments are typically fixed payments, but borrowers pay less in total interest if the loan is paid back more quickly than agreed upon.