Equipment Financing vs. Merchant Cash Advance

equipment financing

What’s the Best Option For Your Business?

Both merchant cash advances (MCAs) and equipment financing can be a viable way to get extra capital for your business – and purchase or rent new equipment. From POS systems at a retail store to power tools for a handyman, or even large, heavy-diesel equipment for a construction contractor, you can use either an MCA or equipment financing. But what’s the right choice? In this article, we’ll take a look at both equipment financing and MCAs, to help you make your decision.

Equipment Loans – Secured Financing For Purchases Of New Or Used Equipment

An equipment loan is, essentially, a type of secured installment loan. It’s secured – meaning that, if you default on the loan, the lender has the right to repossess the equipment which you purchased. And it’s an installment loan – meaning it must be repaid in regular, non-fluctuating monthly payments.

You can finance up to 100% of the cost of either new or used equipment, making it an attractive option for many business owners. And because the loan is secured by the value of your equipment, you may qualify even if you don’t have a stellar credit score. Interest rates usually vary from about 8-30%.

One variable, though, depends on what you’re financing. For example, an expensive front-end loader for a construction site will probably be easier to re-sell and hold its value better than a new server farm for your office – the lender will take this into account when issuing your loan, so it may be harder for you to finance items that depreciate quickly, like computer systems.

In addition, you will need a relatively good credit score to get a reasonable interest rate – and if your credit is very poor, you may be rejected for an equipment loan entirely.

Merchant Cash Advances – Ideal For Businesses Which Need Additional Flexibility

A merchant cash advance isn’t a loan. Instead, it’s a purchase of your future sales. Your merchant cash advance company gives you a lump sum of money – and over a period of time, you repay it by giving them a percentage of your sales, until the cost of the advance and all related fees are repaid.

Because the money is secured by your future sales, this means you can obtain an advance even if you don’t have good credit – as long as you’re able to show that your business consistently generates sales.

The other benefit of merchant cash advances is that they can be used to buy more than just equipment – you can purchase additional inventory, or invest in a marketing campaign, for example.

And because an MCA is repaid based on your sales, you won’t have to worry about not being able to meet monthly minimum payments, which can be quite steep for traditional equipment loans.

So, What’s Right For Your Business?

If you’re purchasing a few pieces of expensive equipment that will depreciate slowly and you have a reasonable credit score, an equipment loan could be the right option for you. But if you need more flexibility, a merchant cash advance is a better option, particularly if you do not have a perfect credit score. In the end, it comes down to your own personal preferences, your situation, the industry in which you’re working, and your own business finances. Do a bit of research on both options, and you’re sure to make an educated choice for your business.

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