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Cash Advances: Settling The Confusion

With all the different types of immediate cash loans available in the financial lending industry how do you know which one is right for you? The financial services industry utilizes a wide variety of terms that can be very confusing to a new borrower. Some commonly confused terms are a merchant or business cash advance, a payday loan or cash advance, or one of the many other terms associated with these types of fast cash products. There are several distinctions among these terms that are highlighted below in an attempt to help the new borrower make an educated decision when requesting a cash loan.

What is a Payday Loan or Cash Advance

A payday loan, also known as a cash advance or payroll advance, is a short term loan usually secured by a personal check or an ACH (Automated Clearing House), an authorization on the borrower’s bank account similar to a direct deposit. Some online companies receive access to a borrower’s account to receive as well as repay the loan. Other companies may simply hold a personal check for the advance amount plus interest.

Most companies that provide a cash advance or payday loan offer borrowers anywhere from $100 to several thousand dollars. A borrower does not require perfect credit to secure this loan. The amount borrowed plus interest is generally paid back in a week or two when the borrower receives his or her paycheck, but it can be extended for a fee. This loan product generally targets the individual looking for immediate cash to deal with everyday expenses. Although this loan product is often recognized as a cash advance, it is completely different from a merchant cash advance or business cash advance.

What is a Merchant Cash Advance/Business Cash Advance

A merchant cash advance also commonly referred to as merchant cash advance is a short term loan secured by a company’s future credit card sales. The two terms are often interchangeable. The lender establishes access to the borrowing company’s credit card processing institution and then electronically is repaid a portion of each credit card sale towards the advance. The processed payments end when the amount of the cash advance plus a set interest amount is paid back.

Most lenders that offer a merchant cash advance or business cash advance are targeting business owners as borrowers. As with payday loans the borrowing company does not require perfect credit. The loan amounts typically range anywhere from $1,000 all the way up to $500,000 and more. This type of loan plus the interest amount is usually paid back anywhere from a few months to a year or two depending on how the advance is structured. This product is considered alternative financing for businesses that cannot secure financing through traditional lending options.

If you are an individual looking to secure a small amount of financing for a very short term than a payday loan is likely the product you are looking for. However, if you are a business owner trying to secure a larger amount of capital for a longer term then a merchant cash advance or business cash advance is likely the product right for you. Although the names used to describe these products are similar there are very clear distinctions as to the type of loans they are and the type of borrower seeking financing.