What’s the Difference Between Cash Advances and Loans?

The Bottom Line: Both business loans and cash advances provide the capital that you need to grow right away. The primary difference between the two rests in how they are paid back.

Nearly every small business needs a little extra funding from time to time. And this is especially true if your company is just starting out, or if you’re taking on a new challenge.

Often, the key to achieving financial success is identifying the optimal loan or cash advance for your business. But how do you know if a cash advance or a loan better suits your situation?

What’s the difference between cash advances and loans anyway? It’s a fair question because in principal they’re similar, but in practice they vary greatly.

Business loans are paid back with set terms and payments over a predetermined period of time. Merchant cash advances, on the other hand, are paid back based on and through credit card sales, depending on your daily or monthly credit card transactions. Payments can vary from month to month, which eliminates the stress associated with large unexpected payments.

The good news is, once you understand the difference you can begin to formulate a funding plan that will help your business reach new heights. Let’s take a look at each a little more in-depth:

Business Loans

Most business owners will probably be familiar with the anatomy of a loan, but just as a refresher we’re going to go over it again.

A business loan is usually fairly straightforward: a lender agrees to give a business owner an amount of capital up front, and in return the business owner agrees to pay that amount back over a period of time with interest.

In general, that business owner will pay a minimum amount of the loan sum and the interest on it back once a month. And if the business is doing well they can put more money down to shorten the length of the loan, or else extend the loan if needed.

Note also that there are a number of different loans under the “business loans” umbrella, including SBA loans and loans without collateral.

Merchant Cash Advance

A cash advance is like a loan in that the lender agrees to give a business owner a certain amount of money up front with the promise of repayment at a future date. That much remains the same between the two. The difference lies in how the forwarded sum is paid back.

In a cash advance, a company pays back a percentage of their credit card sales to cover the forwarded sum –– usually after a day or week of business. So rather than requiring a set payment amount at the end of the month, a cash advance will instead take an agreed upon portion of credit card sales.

This means that a business is only charged for money they make. Because that can vary day-by-day, week-by-week, it means that payments on a cash advance will vary also. Lean times will yield smaller payments, while successful months will in turn produce a higher payment.  

The Difference Between Loans & Cash Advances: The Bottom Line

There are pros and cons to both business loans and cash advances; with a loan you’ll know exactly what you’ll owe each month and can plan accordingly.

And with a cash advance you’ll never have to pay more than you can afford –– because it functions around your own sales. The good news is, now you understand the difference between cash advances and loans –– so you can make the best call for your business.

How to Apply for a Cash Advance or Loan Today

However, if you’re still unsure what route to choose, don’t fret. You can contact the National Business Capital & Services team today at (877) 482-3008. We have experience in a myriad of industries and will help your company secure the funds you need.

Or, if you already know the type of financing you’d prefer, fill out our 60-second online application today to get the funds you need in as little as 24 hours.

Learn More About Business Cash Advances and Loans in Your Free eBook

For more information check out our free eBook on all the opportunities your business can enjoy –– provided you get the proper funding!

difference between cash advance and loan

National Business Capital & Services is the #1 FinTech marketplace offering small business financing and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.

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About the Author, Megan Capobianco
Megan Capobianco is the Marketing Manager at National Business Capital & Services. Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.