ACH Loan or a Merchant Cash Advance? Understanding the Difference
Traditional business loans are becoming increasingly difficult to obtain. This has caused more business owners to consider alternative financing options to get funding for business growth. With multiple funding options to choose from, how do you know which would be best for your business? Two popular options for business funding are the ACH loan and the merchant cash advance. However, just because they are a popular choice, that doesn’t necessarily mean either is the right choice for your business. To make a wise decision when choosing between these or any other alternative funding options, it’s important to understand how they differ. Let’s take a more in-depth look at each of these options to make the choice easier.
The ACH Loan
Although it is called a loan, an ACH loan is actually an advance on future revenue. ACH (Automated Clearing House) refers to the method of repayment. With an ACH loan, the business receiving funding will repay the lender via direct withdrawals from their business bank account.
These withdrawals are a set amount taken at specific intervals and will be monthly, weekly, or daily depending on the terms offered by the lender. Regardless of any fluctuations in your incoming revenue during the repayment period, your payments will remain the same. If your revenues should decrease during the repayment period, you could face a serious disruption in your cash flow.
ACH loans are designed for most types of business and can be a good option for short-term funding. When evaluating your application for ACH funding, lenders will be more interested in the average daily balance of your business checking account rather than your credit score. Loan amounts are generally smaller than some other funding options and the APR can be significantly higher. There are often origination fees, prepayment penalties, and other costs.
The Merchant Cash Advance
There are many similarities between the ACH loans and a merchant cash advance, which can lead to confusion. The merchant cash advance is also not considered a loan and payments are made automatically. It is an advance on future credit and debit card revenues and is designed specifically for merchants who receive most of their revenue via debit and credit card sales.
Repayment is based on and deducted from these sales. This is where the major difference between the merchant cash advance and an ACH loan is revealed. While ACH payments are static, merchant cash advance payments fluctuate with the rise and fall of debit and credit card sales. This built-in flexibility can help to prevent any cash flow disruptions during the repayment period that could impact daily operations. The repayment schedule can be monthly, weekly, or daily depending on the terms offered by the merchant cash advance provider. The APR for the merchant cash advance will be higher than that of traditional loans. There is no opportunity to pay down the principle in order to decrease the interest due. The full interest amount must be paid along with the entire advance amount before the merchant cash advance is satisfied.
Alternative Finance Professionals
As you can see, like most funding options, there are pros and cons to both ACH loans and merchant cash advances. However, with the low approval rate of traditional business loans and the long line of business hoping to receive SBA loan approval, alternative funding options can be a great source of timely short-term funding to address your current business needs.
CapFlow Funding Group works with a variety of different industries to provide the funding they need to keep their businesses moving forward. Although we specialize in invoice factoring, we work with trusted partners to provide merchant cash advances as well as other options. We can also help you understand the differences between the options available. Our goal is to provide you with the best possible funding solution for your business. Contact us today to see how we can help you get the funding you need.