Are you a business owner seeking funding but feeling overwhelmed by your options? Two popular choices—asset-based loans (ABLs) and merchant cash advances (MCAs)—offer unique benefits and drawbacks. Let’s simplify these options to help you find the best fit for your business’s financial needs. Boundless is here to help you decide on the right funding avenue for your business.
What are Asset-Based Loans (ABLs)?
ABLs are a way for businesses to borrow money leveraging their assets as collateral. These assets typically include inventory, accounts receivable, equipment, or real estate. Lenders evaluate the value of these assets to determine how much they can lend.
Eligibility for ABLs
To qualify for an ABL, businesses typically need to meet several criteria:
1. Strong Asset Base: Your business must have valuable assets to use as collateral.
2. Creditworthiness: While ABL focuses less on credit scores than traditional loans, having a good credit history can help you secure better terms.
3. Cash Flow: Lenders review your business's cash flow to ensure you can repay the loan.
4. Business History: Lenders prefer businesses with a proven track record, making it harder for newer companies to secure ABL without strong assets.
How do ABLs work?
Many businesses take loans or lines of credit (LOC) to manage cash flow, like covering payroll during payment delays. If a business lacks cash flow, lenders may accept physical assets as collateral, such as a construction company using its machinery for a loan. Lenders may also include a clause preventing reuse of the asset for other loans. Loan terms depend on the asset's value. Lenders prefer liquid assets like securities. Loans with physical assets are riskier, so they offer less than the asset’s value. Interest rates vary based on credit, cash flow, and business age. For example, if a construction company offers machinery valued at $100,000 as collateral, the lender might only approve a loan for $60,000 to $70,000, due to the risk of using physical assets. The interest rate could range from 8% to 15%+, depending on the company's credit score, cash flow history, and how long it’s been in business. Interest rates differ because lenders evaluate the risk that the borrower may not repay the loan.
Who are ABLs for?
Asset-based loans (ABLs) are ideal for companies needing to improve liquidity or with substantial capital tied up in their assets. Industries that commonly use ABLs include retail, construction, restaurants, and wholesale. At Boundless, our ABL partners are looking for $500,000 as a minimum loan amount and roughly $1,000,000 in qualified collateral to be used as part of the transaction. Not sure if your business qualifies for an ABL? Schedule a quick call with the Boundless team to find out if you’re eligible.
What are Merchant Cash Advances (MCAs)?
A MCA is not a loan but an advance against your future sales. This type of financing is typically offered to businesses that accept credit card payments. With an MCA, you can start receiving a loan for as little as $5,000 - $10,000. It’s mainly geared towards companies that have at least six months of history, those looking to solve an immediate problem, or those that are fairly new with little revenue history to show and need access to quick capital to help with growth.
Eligibility for MCAs
Qualifying for an MCA involves:
1. Credit Card Sales: Your business must have consistent credit card transactions since repayment is based on daily sales.
2. Cash Flow Requirements: Lenders look for healthy cash flow to ensure you can meet daily repayment obligations.
3. Minimal Credit Check: Many MCAs do not require a strong credit score, making them accessible to businesses with less-than-perfect credit.
4. Business Experience: Some lenders prefer businesses with a longer operational history, but many are willing to work with newer businesses.
Who are MCAs for?
According to Lightspeed, MCAs are well-suited for businesses that are seeking short-term cash flow or quick cash to fund an immediate expense. Business profiles that MCA would be ideal for are;
1. Seasonal businesses: businesses that need cash due to seasonal fluctuations.
2. Businesses with few assets: business owners who want to avoid the collateral needed for secured loans.
3. Businesses with poor credit: MCAs don’t affect credit scores or help build credit.
Important terms to understand when looking at a MCA:
1. Factor rate: The factor rate indicates the cost of the advance as a decimal, and when combined with the advance, it reflects the total amount that needs to be repaid. For example, if a business receives a $100,000 advance with a factor rate of 1.2, the total amount to be repaid would be $120,000.
2. Flat fee: Like a factor rate, a flat fee represents the cost of a cash advance, but it's calculated differently. A flat fee is determined as a percentage of your cash advance and is added to the total amount you need to repay. For example, with a $100,000 advance and a 12% flat fee, the total amount to be repaid is $112,000.
3. Purchase amount: This is the total of the cash advance plus its cost, whether calculated as a flat fee or a factor rate.
4. Holdback or remittance rate: This is the portion of your daily or weekly sales that your MCA provider deducts to repay your cash advance. If your company may be a fit for an MCA, hop on a call with the Boundless team to see if your business qualifies.
Comparing ABL vs MCA
Asset-based loans
Pros:
- Lower interest rates.
- Longer term lengths.
- Improvements to cash flow.
Cons:
- Requires qualified assets (AR, Real Estate, Equipment, Inventory, etc).
- More reporting is required.
- Additional time and effort needed to close.
Merchant cash advances (MCAs)
Pros:
- Quick access to cash.
- Minimal credit checks.
- No collateral required.
Cons
- Higher cost of capital.
- Temporary solution as it is mainly used for immediate cash flow needs.
- Shorter term lengths.
Which Option is Right for Your Business?
Choosing between an ABL and MCA depends on your business’s unique circumstances. If you have valuable assets and stable or positive cash flow, ABL may provide lower interest rates and longer repayment terms. On the other hand, if you are an asset-light business, need quick access to cash and have consistent or growing revenues, an MCA might be the better choice.
At Boundless, we work with over 100 lenders across the United States and Canada. Our platform not only accurately matches you with the right lender(s) based on your unique business needs but also provides transparency on all available options. Our team is here to help you understand which funding solution is best for your business. Simply create one profile, and we’ll handle the rest.
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