The number of MSMEs in India grew 18.5% year-on-year to 25.13 lakh units in 2020 from 21.21 lakh units of 2019. This growth resulted in the MSME sector contributing heavily, about 29% towards the country's GDP.
In order to promote this sector and ensure its progress, leading institutions have introduced a bouquet of financial products. Prominent examples among those are merchant cash loans and working capital loans. However, the question of which of these financial products is more suited for a business depends on their offerings and key differences. Business owners must find out them in detail to make an informed decision.
What are merchant cash loans?
This financial product extends advances to business owners against the future sales of an organisation. Typically, it is available to companies that entail a significant sales volume through payment cards.
Here, entrepreneurs receive a lump sum from their financiers, and they get repaid through a portion of everyday sales via payment cards. In the case of this loan, the debtor and the lender enter into an agreement regarding repayment terms, payback amount, etc.
Following are some features of merchant cash loans –
It is a short-term solution that can be availed instantly without much hassle
It does not require any collateral
Offers flexibility of usage
Has a hassle-free repayment structure
Though it has multiple benefits, one cannot overlook the interest rate levied against it. When compared to traditional business loans, the interest rate of merchant cash loans is quite high. This makes repayments a costly affair and increases the chances of a default. Therefore, as its alternative, business owners can opt for a working capital finance to manage their operational expenses.
What is a working capital loan?
Working capital is an indispensable part of any business. It allows companies to fund their day-to-day expenses and keeps the cash flow intact. Moreover, healthy working capital can further strengthen the financial foothold of any company.
Working capital advances are a type of business loan, and they allow entrepreneurs to source necessary funding for their business needs.
Here are the features of working capital loans –
Working capital finance is an ideal financing method to meet short-term monetary goals.
The repayment terms are more flexible, and individuals can pay it off with easy instalments.
It does not require any collateral to avail funds.
The eligibility terms are lenient, and business owners can easily meet them.
Leading financiers can disburse funds within 24 hours of approval.
Interest rates on this financial product are competitive, which makes repayments affordable.
The benefits of a working capital loan make it a suitable source of credit for business owners who are looking for quick funds. Borrowers can use an online calculator to figure out how much working capital their business needs.
Nonetheless, both these financial products offer two different sets of benefits; hence, a comparison can help individuals make the right decision.
Differences between merchant cash advances and working capital credit
Here are some notable difference between these two financial products –
Interest rate: Merchant loans attract a higher interest rate when compared to a working capital advance.
Availability: Working capital loans are available to every organisation irrespective of whether they use POS machines. However, to get a merchant cash advance, one needs to make business transactions via payment cards.
Repayment tenor: Both of them are short-term financing options, but working capital credit offers a longer repayment period. Hence, repaying a working capital loan is more effortless when compared to a merchant loan.
Repayment method: Working capital credit extends a structured EMI facility for repayment. Thus, repayment is hassle-free. Whereas, with merchant cash loans, there are no such facilities.
Irrespective of the financial requirements, one can avoid such complications and opt for traditional business loans. They offer similar benefits but at better loan terms.
Additionally, lenders like Bajaj Finserv extend pre-approved offers, which streamline the application process. Individuals can avail of such offers on financial products like business loans, personal loans, etc. You may consider to check your pre-approved offer online by registering their name and contact information.
Merchant cash loans is a cash advance facility for businesses. It offers some borrower-friendly benefits but has its limitations as well. In this regard, a business loan is an ideal option to keep a business financially healthy.
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