Pros and Cons: Cash Advance Vs Small Business Loan

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Starting up a new small business is an expensive endeavor. Costs of course vary depending on what type of business you want to launch—for example, a mobile service like car detailing can run between $1,000 and $25,000 to open while a brick and mortar retail store can cost as much as $100K.

Unless you have a huge amount in savings, you will have to find some source of financing to achieve your dream of business ownership.

Two of the most common options are the cash advance and small business loans. To decide which choice is best for you, it’s important to learn as much as you can about each one, including their pros and cons:

Cash Advance 101

When you hear the phrase “cash advance,” you might think it is referring to money that a wealthy friend or loved one loans to you in order for you to open your company. While this may be an option for you, think twice about borrowing money from a loved one. Yes, the process will probably be less formal than filling out paperwork through a bank, but if you are unable to pay the money back in the agreed upon amount of time, your relationship with your friend or family member may suffer. 

Instead, it might be wise to look into a merchant cash advance, which involves the lender essentially purchasing a portion of your future sales to pay back the amount loaned. The lending company will typically give you an advance that is worth a multiple of the amount you expect to make each month. Then, once you open for business, the creditor will take the decided portion of your sales.

Pros and Cons of a Cash Advance

For entrepreneurs who are looking for loans for businesses with no credit or a less than stellar credit score, a merchant cash advance is a solid option, and you can also get your hands on the cash very quickly. At the same time, it can be an expensive option once fees are factored in and repaying it on the agreed upon schedule can mean your cash flow takes a hit.

All About Small Business Loans

As its name implies, a small business loan is a loan that you can use to set up your new company. With small business loans, you will usually receive the full amount of the loan in one chunk and then repay it slowly but surely over a long period of time—anywhere from a number of months to years. The small business loan will have to be paid back with a pre-determined interest rate. Fortunately, in many cases, if you are able to pay it back quicker you could save money on some of the interest charges—just be sure to ask your lender if you will be penalized for paying off early.

Why Consider a Small Business Loan

There are a number of benefits to deciding on a loan for small business financing. For example, if you have decent credit, you may be able to secure a low rate and a large amount of money, and because it will include fixed payments, the number of payments you have to make along with the amounts you will need to pay each month are determined right from the start, which makes it easier to plan ahead and budget. On the flip side, if there are cash flow issues with a small business, repaying the loan can become problematic.  

Good Luck with Your New Venture

Fortunately, you do not have to be super wealthy or ask relatives for money to fulfill your entrepreneurial goals. Both a cash advance and a small business loan are great options to help you get the finances you need to turn your dreams into reality. By knowing more about each one and the pros and cons, you can make the best decision for you and your financial situation.

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