Two of the most common business funding products are merchant cash advances (MCA, also called revenue-based financing) and term loans. They look similar — lump sum upfront, repay over time — but they're structurally different. Understanding the difference can save you significant money.
Term loan basics
Lump sum funded upfront. Fixed monthly payments. Fixed term (typically 12-60 months). Fixed cost (interest rate). Best for: substantial defined needs with predictable repayment ability. Equipment purchase, expansion, real estate.
Merchant cash advance / revenue-based financing basics
Lump sum funded upfront. Repayment via daily or weekly ACH (or percentage of card sales for true MCA). Repayment scales with revenue — slow week, smaller payment. Cost expressed as factor rate (e.g., 1.25 = pay back 1.25x what you received). Best for: variable revenue businesses, urgent capital needs, businesses that don't qualify for term loans.
Cost comparison
Term loans typically have lower effective APR than MCA but slower approval and stricter requirements. MCA is faster, more accessible, but more expensive per dollar. For a $50K need over 12 months: term loan might cost ~15-25% APR (~$5-8K cost). MCA might cost 30-50% APR equivalent (~$10-15K cost). Speed and accessibility have a price.
Cash flow impact
Term loans have flat predictable monthly payments — easier to budget. MCA payments scale with revenue — better for seasonal businesses but harder to predict. If your business has consistent monthly revenue, term loans win on payment certainty. If your business is highly seasonal or variable, MCA's flexibility helps avoid getting underwater on a slow month.
When MCA makes more sense than term loan
Speed is critical (4-hour funding vs 1-2 week term loan timeline). Credit is below 650 (term loans become hard to qualify for). Revenue is highly seasonal (MCA's revenue-scaled payments help). You need short-term bridge capital (6-9 months) where APR matters less than total dollar cost over the period.