Hard Money vs Merchant Cash Advance: Which is Better?

Securing financing for your business can be a tiresome process that can require hours of research and analysis to find the best solution for your needs. Two options include hard money or a merchant cash advance. Both offer some unique benefits that are worth weighing, as well as some cons that need to be considered. In this guide, we’ll explore the differences between hard money and a merchant cash advance and will help point you in the right direction for your financing needs.

What is a Merchant Cash Advance?

A merchant cash advance, or MCA, is a unique financing solution that uses your business’s card sales as collateral to secure capital. Instead of relying on credit ratings and personal guarantees, a merchant cash advance will more heavily weigh your business’s revenue in the approval process making it easier for some businesses to qualify.

It’s worth noting that a merchant cash advance is not a loan and doesn’t follow the same regulatory guidelines required by local and federal laws. This allows for more flexibility in the approval process and funders’ leeway in how they vet borrowers. Because they are not loans, there are no predetermined interest rates for an MCA. Instead, you can do the calculations yourself to determine the approximate APR that your agreement costs. 

To determine the cost of your financing, a factor rate is applied to the amount of financing that you apply for. This number will vary depending on the credibility of your business but often ranges from 1.2x to 1.4x. For example, if you request $100,000 in capital – the total repayment amount could range from $120,000 to $140,000 over the life of the agreement. 

The remittance schedule for MCAs also varies from traditional financing methods. Instead of fixed monthly installments, remittance is made as a percentage of your business’s card sales. For example, you may agree to pay 15% of your monthly card sales. This means that your remittance will vary from month to month depending on your actual card sales.

Benefits of a Merchant Cash Advance

There are many advantages of merchant cash advances. 

First, because your business’s card sales are used as a form of collateral, you don’t need any additional collateral to back your financing. This is especially useful for businesses that lack additional assets to secure more traditional forms of financing.

Additionally, merchant cash advances can be more advantageous for your business’s cash flow because your monthly remittance is not fixed. Instead, payments are dependent on your business’s revenue – which can be more affordable and lessen the chances of becoming “underwater” on your financing.

If your business has a poor credit rating, a merchant cash advance might be your best opportunity to secure financing. Because funders heavily weigh your business’s revenue instead of your credit score, you could be approved even with a less-than-perfect credit score. 

Finally, the funds secured from a merchant cash advance aren’t restricted to certain uses. This gives you more flexibility with your financing. Whereas other types of small business financing might require you to use your funds on certain expenses, you can use a merchant cash advance for any expenses or investment you’d like. Whether it’s to meet payroll, expand to a new location, or purchase inventory to meet seasonal demand, using a merchant cash advance can be a great option.

You Should Use a Merchant Cash Advance When:

• Your business lacks the collateral to secure traditional financing
• Your business has a poor credit rating
• Your business has a strong, stable history of card sales
• You need financing quickly
• You prefer flexible payment options that are congruent with your business’s current revenue
• You need to bridge short-term cash flow obstacles 

What is Hard Money Lending?

Hard money lending is a type of alternative financing that offers you cash in exchange for monthly payments, very similar to a traditional bank financing. However, hard money lending is not offered by your bank or other financial institutions. Instead, you must find them through individual investors or private companies who are willing to lend money.

Hard money lending can be a great alternative for businesses that don’t want to navigate through the lengthy underwriting process that most traditional funding methods require. Because you’ll work directly with an individual or private company, your relationship with them can come into play. If you’re able to develop a strong relationship with them, you may be able to secure more favorable terms and rates than other types of financing.

In general, hard money funds are often used for short-term financing solutions with periods under one to five years. 

Interest rates on hard money lending can also be much higher than traditional options. It’s common to see interest rates in the double digits for hard money making it one of the more expensive financing options available. 

Benefits of Hard Money

The main benefit of using hard money is that it can be an extremely fast way to secure financing with lenient requirements. Because you will be working with an individual or private company, the qualifications can vary depending on a multitude of factors.

Instead of going through a cumbersome underwriting process, with hard money – funders are more open and willing to work with businesses of any type.

On some occasions, businesses might prefer a fixed payment schedule that hard money offers. Because your payments aren’t based on a percentage of your revenue, you’ll know exactly how much you owe each month providing stability for your finances.

You Should Use Hard Money When:

• You need capital extremely fast within a few days
• You have a strong credit score
• Your business has a strong history of performance
• You have additional collateral to back your financing
• You have a strong relationship with the individual or lending company
• You are just starting your business and lack significant revenue

Which Financing Solution is Best for Your Business?

So, which is better – hard money vs merchant cash advance?

Ultimately, it’s going to depend on your business and unique needs. 

If you want more flexible payments – a merchant cash advance might be a better option because your remittance is based on your actual income and aren’t fixed.

However, if you need cash within the same day or two, a hard money funding is oftentimes quicker because they consider factors like your credit rating

In terms of cost and affordability, both hard money and merchant cash advances are similar. For businesses that have a strong reputation and business history, your costs can be lower.

In many cases, hard money financing will require some sort of collateral or personal guarantee to back your financing. If you lack (or do not wish to supply) additional collateral, a merchant cash advance is better suited for you. 

Finally, it’s important to understand that not all merchant cash advance funders are the same. Specialty Capital offers industry-leading prepayment discounts that can drastically reduce the overall cost of your financing. 

If you’re ready to see which type of financing is best for your business, get in touch with us today and our team of experts will help you decide what solution is best for your business.