7-min read Feb 24, 2022

Merchant Cash Advance Vs. Payroll Funding

Merchant Cash Advance Vs. Payroll Funding

In the era of COVID-19, small and even medium-sized businesses are struggling to make ends meet. Cash flows have dwindled, leaving many business owners with few options. The shrinking economy has caused layoffs, closures, and general unrest among businesses and consumers alike. Will economic reform revitalize the economy going forward? Do vaccines hold the key to ending the COVID-19 pandemic and letting businesses get back to normal?

As of yet, there are no clear answers to these questions. However, it is abundantly clear that small businesses are hurting. Business owners need cash to re-energize their cash flow and keep their businesses running smoothly through these difficult times. Two of the common options that small businesses in need of a short-term cash injection are: a merchant cash advance or payroll funding loan.

This begs a few important questions. For example, what is a merchant cash advance? What is a payroll funding loan? Moreover, merchant cash advance vs. payroll funding: which is the best solution for your business? In the following guide, we will answer all of these questions and more. Read on to learn the benefits, drawbacks, and differences between merchant cash advance vs. payroll funding!

What Is A Merchant Cash Advance?

A merchant cash advance (also known as a business cash advance) is aptly named, as it is a lump sum of funds for merchants that sell products or services. An MCA loan is a form of short-term business funding that gives businesses more freedom to make micro-loan payments on a weekly or even daily basis. The provider or lender of an MCA loan is repaid a small sum of the loan whenever the merchant (the borrower) makes a sale. Generally, the loan’s provider works with a business to estimate future sales and agree on a percentage of sales that works for both parties.

When searching for MCA financing, it is important to remember that loans must be paid back within a set amount of time, regardless of how many sales your business makes. This means that you will need to pay back the loan in full — plus interest — according to the stipulations of your MCA loan contract. It also means that you will have to deduct a percentage of every sale to help pay back the loan.

How Merchant Cash Advances Work

Merchant loans provide business working capital, just like most standard business loans, though the way in which you pay will vary. For example, once the loan has been finalized, you will receive a lump sum according to the loan contract. Starting on a predetermined date, a set percentage of all your business’ debit and credit card sales will be deducted from your accounts. These payments go directly toward the principal loan and any accumulated interest.

There are various merchant cash advance companies that offer short-term MCA loans to eligible businesses. However, interest rates and loan terms will vary. Be sure to do your research before taking out merchant loans with any provider, as debt can quickly accumulate with a merchant cash advance loan.

What Is A Payroll Funding Company?

A payroll funding company is essentially a lender that can extend lines of credit to businesses in need of cash to make payroll. This ensures that you can pay your staff on time while you wait for cash flow to free up. Funding payroll in this way can ensure that your business maintains its staff without severely reducing cash flow.

Providing payroll on time is vital for building a successful, well-run business. It’s one thing for your business to wait on client payments, but it’s another thing entirely for your employees to wait on their paycheck. Rather than trying to work through a payroll or staffing disaster, consider looking to a payroll funding company for payroll financing solutions that will meet your needs.

The Difference Between Payroll Funding and a Merchant Cash Advance

On the surface, payroll funding and merchant cash advances look pretty similar. They both provide businesses with immediate liquidity in exchange for interest or fees later down the line. However, there are some key differences that make payroll financing a far superior option for maintaining a healthy cash flow during difficult times. Let’s take a closer look at some of the benefits of choosing a payroll funding company over a small business cash advance:

  • Cost – MCA loans often come with exorbitant interest rates that make it harder to regain your financial footing. Alternatively, payroll funding usually comes with more competitive interest rates.
  • Flexibility – With payroll funding, you can choose to pay your loan off early or just pay for the time that you actually used the borrowed funds. Paying down your loan early could end up saving you a lot in interest fees, whereas MCA lenders charge the same total interest and fees whether you keep the money for a partial length or the full length of the loan.
  • Fees – MCA lenders commonly charge large fees on top of the interest charged on the principal loan. Alternatively, payroll funding companies do not charge any underwriting or processing fees for their services.
  • Structure – Payroll funding companies are direct lenders, whereas most MCA providers function as “middle men” and brokers for third-party loan companies.
  • Advisement – When you take out payroll financing, you’re required to put that money toward your payroll costs. This means that payroll funding companies have no incentive to let you take on more cash than you need. On the other hand, MCA funds can be used for any part of your business. As a result, MCA lenders often advise small business owners to take on more debt than they can handle, ensuring that the lender makes a lot of money in interest and fees. In short, payroll funding companies work with you to ensure that the funds are in your account on time, while MCA lenders are incentivized to make your business overextend itself.

4 Things to Consider Before Acquiring Payroll Funding

While payroll funding is superior to merchant cash advances in most ways, it is not without its drawbacks:

  • Requirements – Payroll funding companies have stricter requirements than MCA lenders. For example, you cannot get payroll funding loan unless you have W2 employees. More specifically, your business must have at least 3 employees and must have been in operation for at least 2 years. Alternatively, you can get an MCA loan regardless of your staffing circumstances.
  • Fund Limitations – As previously stated, payroll funding loans can only be used to pay for payroll costs. If you require a larger loan for more general working capital, an MCA lender can often provide one.
  • Payment Timeline – Payroll funding must be paid back to the lender no later than 28 days after you receive the initial funds. With an MCA loan, you have more options and freedom to make payments over an extended period of time.
  • Outstanding Taxes – You cannot acquire payroll funding if you have outstanding payroll funding taxes. While unpaid taxes could make it harder to secure an MCA loan, you can still acquire one, even if you owe payroll funding taxes.

We hope you found this guide on merchant cash advance vs. payroll funding useful! If you’re interested in learning more about the advantages of payroll funding, feel free to reach out to Payro Finance today!

Morris Reichman


Morris Reichman is the founder and CEO of Payro Finance. Former Vice President at Infinity Capital Funding an alternative finance company, Morris possesses a versatile background in the finance industry. Having spent 7+ years working across global macro operations and start up corporate finance Morris's expertise is in business accounting, risk management and investment analysis. Morris founded Payro Finance to support business owners and ensure their business continuity.

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