SBA, MCA, or Conventional Lending: What’s Right for You?

You have an array of funding options to choose from if you’re looking for financing for your business. When deciding what type of financing is best, it’s essential to identify your needs and compare loan and product options. Familiarizing yourself with the products available is key to your financial future; you need to gather correct and current information to understand loan terms, rates, repayment options, requirements, approval processes, and more. 

Identify Your Business Needs

There are several factors to consider when selecting financing for your business, including:

  • A timeline for when the funds are needed.
  • Current credit standing.
  • How the money will be used.
  • How much collateral you have.
  • How long you’ve been in business.
  • What repayment terms work best for you.

Once you have a clear idea of your business needs and plans, it’s time to compare your options. Three popular types of financing include Small Business Administration (SBA) loans, merchant cash advances (MCA), and conventional financing. 

1. U.S. Small Business Administration Loan

The SBA partners with lenders to offer a wide range of government-backed loans. Depending on the type of SBA loan product, businesses are eligible for varying loan amounts; for example, a small business applying for a 7(a) loan is eligible for up to $5 million. The SBA is a viable option for new and established companies alike, from microloans, general small business, and disaster loans to equipment and real estate loans. With little to no credit history, growing and emerging businesses benefit from the SBA’s expanded eligibility criteria and the ability to fund pro forma projects, meaning a company is evaluated based on future projections rather than current performance. Due to its credit enhancement, SBA loans also offer an excellent advantage for lenders. If your business fails or defaults on the loan, lenders can recover anywhere from 50 to 85% of the SBA’s remaining loan balance. This results in a reduced risk for your lender. 

While SBA loans are an excellent short and long-term financing option with competitive rates, longer repayment terms, and low down payment requirements, they aren’t without obstacles. These loans can have a lengthy approval process, require additional paperwork, and may require you to pledge personal assets as collateral. 

2. Merchant Cash Advance

If you’re looking for a short-term, fast-financing option, MCAs provide you with quick access to cash. This type of liquidity financing is a popular alternative to a traditional bank loan, specifically for companies that process high volumes of credit card transactions. You’ll receive a lump sum of cash upfront from the merchant based on your volume of credit card receipts. Instead of paying a predetermined monthly installment or amount, merchants are repaid through a percentage of future debit and credit card sales daily or weekly. 

MCAs don’t require the borrower to put up collateral, and they can be a great resource for borrowers in a financial bind. However, this financing option carries a hefty price tag, with APRs ranging from 70 to 200%. They also require your business to accept credit card payments. Additionally, because MCAs aren’t a loan, this alternative won’t help build your business credit or establish your credit history for future financing needs.

3. Conventional Loan

Conventional business loans carry standard terms and are a common source of financing offered by credit unions, banks, and other financial institutions. Unlike SBA loans, there’s no government guarantee should your business default. For this reason, banks require that borrowers have good credit, a low debt-to-credit ratio, and a sufficient amount of history and profits for the business. Conventional loans typically offer competitive rates but may require the borrower to open a bank account with the institution as well. Conventional financing typically means shorter approval processes as well.

Choose the Best Loan for Your Business Needs

Ultimately it’s up to you to decide which financing type is best for your business, will meet your current and future needs, and positions you for well for future success. It’s essential to take the time to weigh the pros and cons carefully. Thankfully, Loan Mantra is here to help. We take the guesswork out of finding and applying for business financing. 

We’re not only here to guide you through the process of finding the right loan for your business, but we also play an instrumental part in streamlining the application process. Contact us to find the right loan to meet your business needs.