Why should a financing option that gets repaid in a few months be used to cover an investment that will earn money for your business in the next ten years? The answer underscores the fundamental difference between a long term business loan and an MCA funding arrangement. While both are able to contribute money to your business, the experience of repayment will not be the same. An MCA is often used to cover the “gap” in working capital, and a fixed monthly payment business loan gives an owner the ability to have the equipment, inventory, or capital available for a lease, purchase, or cash-out financing, and the payment will be less than the business will generate. The actual important thing to consider is not the speed at which money will come to you, but how much money will be in the business account after the financing begins repayment.

What Is Long-Term Business Financing?

Long-term financing allows borrowers to take longer to pay back a loan to match how long it takes the borrowed funds to benefit the business. A business buying machinery, remodeling a location, purchasing another business, or following a new financing strategy for their older business debt may all need multiple years to see value from the business funds expended.

The SBA’s 7(a) program is a great example of standard business financing. The SBA’s language states a 7(a) loan can be utilized for short- and long-term working capital, the purchase of equipment, the purchase of real estate, corporate shifts and changes in ownership, and approved financing refinance. For the majority of 7(a) term loans, monthly principal and interest repayment will be made from business cash flow. The term itself will vary based on purpose, lender, and the asset’s life.

Longer-term business loans must still be assessed. While a longer term may decrease monthly outflow, the total amount of interest may increase. A long-term financing strategy must support the business and value-generating project over the life of the financing.

How MCA Funding Differs

Funding for MCA is usually described by speed. A cash advance is a capital advance in exchange for future, contracted revenue or liabilities. The FTC describes merchant cash advances as high-cost short-term financing. Collections can happen on a daily or near-daily basis. This presents a cash flow issue different from a regular monthly loan payment.

On the surface, this issue can be easily overlooked on funding day. The business is usually in need of a specific amount of capital and is less concerned with the long-term implications. The real challenges are evidenced once the various demands on the business (payroll, rent, supplies, taxes, withdrawals) post demands for the same, overextended funds. A lightning-fast approval leaves a large amount of uncertainty for the business owner about the impact this advance will have in the near future.

A merchant cash advance is warranted for a short-term or one-time concern as long as the advance and the return are clear. Things become a lot more concerning for the business owner when they take out multiple cash advances to pay off previous cash advances. Then the business has a full-blown debt issue, not just a cash issue.

Long-Term Loans vs. MCAs: Cost and Cash-Flow Comparison

When considering total cost, term loans have an interest rate, a payment amount, a maturity date, and other miscellaneous fees. Cash advances have a factor or purchased amount. Again, these are not APRs. When determining an annualized cost is available, that is useful for comparing products that differ from each other.

The second factor is payment frequency. A business loan with a fixed monthly payment creates a single obligation that can be placed against the upcoming obligation for rent, payroll, insurance, etc. Frequent collections can create a different cash operating pattern. What looks like a manageable total obligation can still feel like a cash operating shortfall before customer payments come in.

Lastly, the length of financing is a differentiator. If a business is acquiring an asset that will be earning the business money for the next eight years, funding that asset that must be recovered in 6 months is a concern. A shorter tenor is not a problem, but the time to recover the financing must be in line with the duration it takes the business to earn the money.

When Longer Financing Terms Make Sense

Longer financing terms are most beneficial for long-term business capital needs, including: equipment purchases, new locations, business acquisitions, commercial improvements, business expansions, and eligible debt refinancing.

Financing should allow adequate usage of the capital before a significant portion of the value is lost to financing. Longer financing structures may also be used for debt consolidation. A business may have multiple cash advances, short-term ACH obligations, expensive credit cards, or other costly debt. Consolidating several high-frequency debt payments to a single low, monthly payment will help improve cash-flow visibility. Money Man 4 Business pays special attention to these types of consolidation refinancing offers when they become available.

Money Man 4 Business states that financing terms can range from 1 to 25 years, depending on the program and the underwriting for the use of funds. The company states that many qualifying consolidation structures can save interest and fees by two-thirds or more for costs of eligible high-cost debt being replaced. Savings will vary based on the previous contracts and new financing, so a comparison must be made.

Why a Fixed Monthly Payment Can Be Easier to Manage

Knowing how much a loan costs over time won’t alter the cheapness of a loan, but it does help to run a business. Having the payment amount and date enables the cash-flow forecast to show if the payroll, inventory, rent, taxes, and the financing payment can all be met in the same month. It is more difficult to manage all these when there are multiple withdrawals throughout the week.

A fixed monthly payment business loan helps to manage cash flow better and test the business’s resiliency against a bad month. A 10% or 15% reduction in sales, a large customer payment being delayed, and an unanticipated repair are examples. If the business still meets its monthly obligations, then the financing was done at an affordable and safe level. If each assumption has to be made for the payment to work, then the financing term was done at an unsafe level.

Money Man 4 Business claims that clients are given CFO-level advice on financing. For a business that has several obligations, the best answer may be to not borrow at all, while keeping existing obligations. The value of the review is separating an approval from a financing decision that is financially beneficial.

How Money Man 4 Business Helps Restructure the Payment

When considering long-term financing, Money Man 4 Business looks at the reason for the money and the obligations of the business. In the case of new working capital, an owner may have enough cash flow, but is losing money to several short-term obligations. In that case, a funding approval may just be hiding the issue.

The company has published several long-term loan and refinancing programs. They include a variety of payment schedules and terms that can range from 1 to 25 years based on underwriting and program availability. The company offers MCAs and other business debt consolidations. The core focus is reducing the burden of many, frequent payments to better retain working capital for payroll, suppliers, inventory, taxes, and other corporate needs.

Money Man 4 Business states that consolidations qualify as significantly lower interest and fees compared to what they’re looking to replace: much higher cost, high interest debt. Effectively, what the business sees will depend on what they paid compared to what remains, the new interest rate, the new term, and how much it cost them to do the replacement. Refinancing comparisons should always focus on the total saving and potential cash-flow improvement.

Frequently Asked Questions

Is a long-term loan always cheaper than an MCA?
Not automatically. Term length, interest rate, fees, credit profile, and total repayment all matter. The advantage is often the ability to compare a defined payment schedule and maturity against business cash flow.

Can MCA funding be consolidated?
Potentially. Eligibility depends on the business, the existing agreements, revenue, credit, and the refinancing program. A side-by-side comparison should show the old total payments and the proposed new obligation.

Are fixed monthly payments always better?
They can improve predictability, but the payment still has to be affordable. A monthly payment that is too large can create the same cash-flow stress as any other obligation.

Choose the Term That Fits the Business Need

Loans must cater to the life of the need. A long term business loan is appropriate for capital that takes longer to generate value. Shorter value generation times may favor a Merchant cash advance. Consider the total cost, net cash received, true APR, fees, payment frequency, and the balance in the account post-repayment.

Money Man 4 Business helps assess different financing options such as monthly payment loans, SBA financing, equipment financing, working capital, or debt consolidation. It is worth reviewing a fixed monthly payment loan before applying for an MCA if you have several short-term obligations and payments draining the account.