Small-to-medium enterprises, or SMEs, represent around 90% of all business, and 50% of global employment according to the latest estimated by the World Bank. Small businesses represent the majority of the marketplace, but lenders are less certain about their prospects and so many such companies fid it difficult to secure credit financing.
Two ways in which an SMEs can secure credit are business loans and business cash advances, but what are the differences?
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What is a business loan?
A business loan is a form of lending, geared towards providing a company or other professional organisation with short-term cashflow – whether for growth purposes, or to weather a downturn in finances. Where a traditional personal loan is leveraged against the individual that applies for it, business loans are most commonly secured against the business and its assets.
There are two key types of business loan: secured, and unsecured. Secured business loans utilise business assets as a form of security or “collateral”, which the lender can seize and sell in the event the business cannot pay back the loan. Unsecured loans are more useful for smaller or younger businesses, as they do not require any form of asset security to set up, but at the same time generally come with a higher interest rate to compensate for the additional risk to the lender.
What is a business cash advance?
A business cash advance is a form of lending based on a given business’ existing and projected card revenue. Cash advances are generally a fixed sum with a variable repayment rate; a lender will examine your cashflow and potential future income from card transactions, and offer you a percentage of that card volume as an advance payment. Repayments are variable in relation to your actual monthly card volume, where you pay less on months with fewer transactions.
What are the differences?
Business loans and cash advances share some core traits in common, but generally serve different purposes. They are both key forms of borrowing for growing and established businesses, presenting the opportunity for sustainable growth with shrewd financial planning. However, they also have some crucial differences that are well worth understanding before making any major decisions on behalf of a business.
Firstly, business loans are a long-term form of lending. Though it is possible to take out short-term business loans, a majority include repayment terms of a year, 18 months or longer – with the ceiling for repayment periods at 25 years. Cash advances are typically shorter-term, and can often be organised more quickly.
While repayments for business loans are regular each month, the amount you repay in total could change depending on the rate of interest on the loan. Meanwhile, business cash advances are for an agreed fixed sum with repayments taken as a proportion of revenue, so the final bill will not change but it may take more or less time to pay it back and the monthly cost will vary depending on revenues.