In short: yes. When it comes to securing funding for your small business, you have several options to choose from. Among the most commonly considered are Small Business Administration (SBA) loans and merchant cash advances (MCAs). But which option is better for your business? The short answer is that SBA loans are almost universally the better choice. They offer longer terms, lower interest rates, and healthier financing options overall.
However, each funding approach serves a different purpose, and understanding these differences is vital for making an informed decision. This blog will break down the advantages and disadvantages of both financing options, while explaining why SBA loans are generally the superior choice for small business funding.
Understanding SBA Loans
SBA loans are a form of debt financing enhanced by the U.S. Small Business Administration. While they are not directly issued by the government, they are backed by an SBA guarantee, encouraging lenders such as banks, credit unions, and other financial institutions to provide capital to small businesses with favorable terms.
Key Features of SBA Loans:
- Interest Rates: Typically between 6% and 10%, SBA loans provide true bank loan rates. The SBA also caps the amount that lenders can mark up these rates.
- Terms: Loan terms are flexible, ranging anywhere from 3 to 25 years depending on the use of funds. Real estate loans can go up to 25 years; working capital loans often range from 7 to 10 years.
- Eligibility Criteria: Borrowers must meet certain credit score thresholds (usually 650 or higher) and provide a detailed personal financial history and statement.
- Collateral Requirements: Borrowers must often provide personal and business collateral, such as real estate, to secure the loan. First-position liens are also typically required.
Understanding Merchant Cash Advances (MCAs)
Merchant cash advances, on the other hand, are not loans at all. Instead, they involve selling a portion of your future business earnings—receivables, credit card sales, or similar revenue streams—to a funding company in exchange for immediate cash. They’re quick, high-risk, and often expensive.
Key Features of MCAs:
- Interest Rates: Not measured traditionally. Instead, you’ll see factor rates between 1.16 and 1.55. These can translate into an effective APR far higher than those of SBA loans.
- Terms: Typically much shorter than SBA loans, often ranging from 3 to 24 months, with daily or weekly repayment schedules.
- Eligibility Criteria: Minimal requirements, with many MCA providers accepting credit scores as low as 500.
- Speed: Funding can be delivered in as little as 1-3 days, making MCAs an appealing option for urgent capital needs.
Comparing SBA Loans and Merchant Cash Advances
To illustrate the differences between these funding types, here’s a quick comparison of key aspects:
| Type | Rates | Terms | Funding Speed |
| SBA Loans | 6-10% | 3-25 years | 10-30 days |
| Merchant Cash Advance | 1.16-1.55 | 3-24 months | 1-3 days |
Clearly, SBA loans offer better borrowing terms across the board. However, there are specific scenarios where MCAs might serve as a last-resort option, which we’ll explore below.
Why SBA Loans Are Superior Financing Options
1. Low Interest Rates Save You Money
Because SBA loans are backed by the federal government, lenders are willing to offer lower interest rates. This ensures that your monthly payments are manageable and allows you to keep more cash on hand for other business needs.
With MCAs, the factor rates create an APR that often exceeds that of credit cards. This can quickly spiral into unmanageable debt if business revenue declines.
2. Longer Terms Provide Flexibility
SBA loans are fully amortizing, meaning they’re structured for long-term repayment. The extended terms—sometimes up to 25 years for real estate loans—mean lower monthly payments and more flexibility for business owners.
MCAs, being more short-term, force daily or weekly repayments. This can strain cash flow, leaving businesses in a precarious financial position.
3. Better Debt Service Management
SBA loans set small businesses up for success by offering amortized payment schedules. With lower rates and longer terms, your repayment obligations will be lower, reducing financial strain.
Conversely, MCAs can drain liquidity with their quick repayment timelines, leaving businesses with little room to recover.
4. Opens Additional Funding Options
Small businesses with an SBA loan often retain the opportunity to secure additional financing. Because SBA loans are structured as first-position debt, they typically leave room for mezzanine or secondary funding options if future needs arise.
MCAs, on the other hand, often leave funding companies with blanket liens on your business assets, making additional funding difficult.
5. Healthier Financing for Long-Term Growth
SBA loans provide sustainable growth financing with predictable repayment options. By accommodating long-term debt repayments, they enable businesses to thrive without compounding financial pressures.
When MCAs Might Be the Better Choice
While SBA loans are almost always the superior choice, there are limited circumstances where merchant cash advances can make sense:
- Speed Matters: If you need capital immediately—within 24-48 hours—a merchant cash advance can provide a quick cash injection. For example, if your point-of-sale system breaks down and you can’t process customer payments, an MCA could fund the repair quickly.
- Low Credit Score: Businesses with a credit score below 650 or underperforming financials often won’t qualify for SBA loans. MCAs offer a path to capital for businesses with scores as low as 500.
- No Personal Collateral Requirements: If you don’t want to risk personal assets such as real estate, a merchant cash advance does not require personal collateral (though a blanket lien may still apply to business assets).
What Should You Do?
While merchant cash advances offer undeniable speed and accessibility for high-risk borrowers, SBA loans remain the gold standard for small business financing. From their low interest rates to their long repayment terms and minimal financial strain, SBA loans set up businesses for long-term success rather than short-term fixes.
If your business has time to apply and qualifies for an SBA loan, it’s the clear winner. The affordability and sustainability of SBA loans cannot be matched by MCAs or other types of alternative financing.
Looking for funding? Start your SBA loan application today and lay the groundwork for a stable and prosperous future!