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Difference between a Business Loan vs an Advance

List of Differences

  1. 1. An advance charges a flat fee instead of interest like a loan.
  2. 2. An advance takes less time to underwrite than a loan (1-6 days) vs (2-4 weeks).
  3. 3. Advances are less regulated than loans so there are more lenders available instead of just big banks.
  4. 4. An advance is usually without collateral other than the borrowers future income.
  5. 5. An advance will normally have daily or weekly payments while a loan will normally have bi-weekly or monthly payments.
  6. 6. An advance is short term and a loan is long term.
  7. 7. Advances are easier to qualify for with bad credit because the lender is buying your future income from you. Proof of income needs to be stable for the deal to go through.

Which should I get?

If you need the money quick/ have a bad credit score / and are certain that you are going to make money in the future/ Only need the money for a short amount of time. Get an Advance.

If you need the money for the long term for a big project go for an SBA or Term loan. An SBA loan is better than a Term Loan because it's subsidised by the government.

If you need the money continuously/on a revolving basis go for a line of credit. It's not a credit card, but it acts like one with a much lower interest rate.

And that's the quick version.

If you need more information, feel free to contact one of us and we'll help you out. We don't use call centers because we don't want to waste your time so we would appreciate it if you used the contact form linked here. If you would like a more verbose explanation you can read full story below..

Revenue-Based Cash versus Traditional Long Term Loans

- The full story

A guide to revenue advances for your business.

As a small business owner, you may be wondering why you should take a revenue funding to secure funding for your business. You might be telling yourself that this type of revenue based funding is too expensive. The truth is, revenue-based funding is not a loan, and you do not pay interest like a traditional bank loan. Find out here whether revenue-based funding is right for your small business.

How does revenue-based funding work?

Revenue-based funding is the purchase of future cash receivables, which is advanced to the business. Typically, the advance is paid back on a daily or weekly basis. The terms are calculated based on a risk factor. The risk factor is based on the business’s revenue for the past four to six months. Some key data points we look at when assessing business bank statements are:

The better the bank statements, the lower the risk factor.

However, many ask: what about my credit score? Having bad credit or no credit can make it very difficult to get a traditional loan. The fact is because revenue-based funding is paid back based on revenue, your credit score is only a small factor compared to your business volume.

Why is revenue-based funding a good idea?

Even though revenue-based funding is paid back within three to eighteen months, you do not have a long-term debt on your business. Further, you do not have to put collateral against revenue-based funding. This means you don't risk any of your assets, whether it be your hard earned home or your favorite car. Being easy to qualify for and being able to get funding within two business days are other great aspects of a merchant cash advance compared to a traditional loan. Typically, you do not ride out the full cost of because you can refinance easily in six or fewer months and get better even terms. Compare this to waiting three to six months to qualify for a traditional loan, just to find out later that you have been declined. We understand that these three to six months can make all to the difference to your business.

When is revenue funding a good idea?

Consider the story of restaurant owner Jasmine Reinhart. Jasmine owns and operates a diner, which is open from 9 a.m. to 9 p.m. every day. She has customers coming in for breakfast every morning and customers rushing in from 12 p.m. to 2 p.m. for lunch hours. During the summer Jasmine was running out of inventory very quickly. Her revenue was great, but she was not making any profit. She started to worry that if she could not stock up for next month, she wouldn't be able to provide an income for herself. Jasmine could not wait for the bank to give her approval for a loan -- she needed the money quickly. The bank asked her to fill out a 10-page application, two rounds of background checks, a list of reasons why she needed the money. Furthermore, the bank asked for a co-signer, asked her to provide all her tax returns, and asked for two years of bank statements. After providing all that information and waiting for a month, the bank eventually turned her down for not meeting its credit score criteria and for unavailability of tangible assets of greater value.

Since Jasmine could not wait any longer, she decided to try a revenue-based cash option. All she provided was a one-page application, the last four months of business bank statements and the last four months of credit card processing statements. The lender approved her within one day and funded her the much-needed $30,000 the next day. She used the funds to buy inventory and hire new employees to assist her during rush hours. The value of this cash was reflected in her increase in revenue from keeping up with inventory and providing better service. The more expensive merchant cash advance was essentially only a business expense for Jasmine, which she paid off in six months. As her revenue doubled, her diner qualified for a higher amount and she refinanced to open a second location. Did Jasmine benefit from a quick cash injection? Was this the right moment for her to try revenue funding? The answer is yes.

All in all, Jasmine utilized her funds wisely and demonstrated a clear need for quick financing. She agreed to take the cash and just paid back a fraction of her revenue instead of keeping a long term debt on her books. She did not pay compound interest. Jasmine was able to refinance easily, keep increasing her revenue, and eventually profit from a wise decision. Jasmine’s story is an example of just one of many small business owners who need cash to grow their businesses throughout the year, and need it quickly. They need to spend their time doing what they do best, which in Jasmine’s case is running her diners -- not filling out intrusive paperwork. Why apply for a traditional loan, which is hard to qualify for and involves a time-intensive application process, when an easier and more readily accessible option is right in front you?

Common criticisms of alternative financing instruments

The fees charged can be higher than that of a traditional loan.

Yes, this can be true. However, with traditional loans, you often have to pay compound interest. This means you have to pay extra interest on top of the interest you already owe. In contrast, revenue funding has a flat rate fee instead of interest that gets charged over time. The interest rate doesn't go up if you take longer to pay. Additionally, revenue funding can sometimes be set up to be paid back as a percentage of your revenue. This means that on days you don't earn as much revenue, you don't pay as much either.

Alternative financing can often contain hidden fees. How do I know I'm not getting ripped off?

Unfortunately, some services do try to hide fees in their contracts. To avoid falling prey to this, be sure to read through your contract thoroughly before signing, and ask any questions you may have. We at Aldora Capital Partners are committed to providing a transparent service and helping you get a good deal.

Contracts are confusing. They're not like traditional loans.

While the terminology is slightly different than that in traditional loans, it is not more complicated. Rest assured that we will work with you every step of the way to make sure that you get whatever instrument that you are best qualified for.

Last Updated Date: 2018-06-20