The main aim of every entrepreneur is to create a successful business. The profits measure a successful business that it earns. But every business owner knows that to gain profit, you need an investment. The investment is required with regard to time, cash, and effort. Cash investments are dependent on many factors, and one of the major ones is small business loans or cash advances.
Which of these two should you opt for? The question cannot be answered without understanding the two.
What is a Small Business Loan?
A business loan is a fixed amount of capital offered by a lender in return for fixed monthly repayments. Borrowers have to repay both the principal amount and interest rate when they opt for small business loans in India. The loan can be used for different purposes, including paying salaries or outstanding bills, investing in new technology, and more. There is a fixed tenure in which the loan is paid. There is a penalty for missed payments.
What is a Cash Advance?
A cash advance is a loan that an entrepreneur can take against their credit card’s line of credit. You can use the credit to get the amount you need. Cash advance repayments follow the same pattern credit card repayments. Interest charged is usually quite high, and that is the reason why cash advance is not as popular as a small business loan.
Difference Between a Small Business Loan and Cash Advance
Both the financing methods involve receiving and repaying a sum of money, even then there are several differences between the two.
| Small Business Loan | Cash Advance | |
| Lender | A loan is given by a lending institution such as banks and NBFCs | Your credit card company is the lender |
| Loan amount | The final principal or loan amount is dependent on many criteria including income, debt to income ratio, etc | The limit of your credit card will decide the highest principal amount that you can take as cash advance |
| Documents | All lenders have a list of the documents required for small business loans. These include documents related to income and business profits | If you already have a credit card, no documents are required |
| Interest rates | Interest rates are usually competitive | Interest rates are quite expensive |
| Tenure | The loan tenure can range from 12-60 months | The tenure may typically range from 30 to 120 days |
| Credit score & penalties | A credit score of 700+ is required to get the loan approved. Non-payment of the EMI will lead to penalty and drop in your credit score | No credit score is required to get cash in advance. Non-payment of your credit card dues will lead to a penalty and drop in your credit score |
| Approval | The approval process requires you to meet the eligibility criteria, fill and submit the form and upload/submit all documents for verification | No approval process if you have a pre-approved credit card |
| Cash disbursement | Funds are disbursed to the registered account after the loan is approved | Instant cash withdrawal. You can go to the ATM to withdraw the cash |
| Collateral | Depending on the type of loan and lender’s policies, collateral may be required | Instant cash withdrawal. You can go to the ATM to withdraw the cash |
Cash advance and small business loans in India are two different ways to access cash. The above table captures the differences between the two concisely and elaborately. A business loan is usually considered better because of its long tenure and a lower rate of interest as compared to the interest charged by the credit card company.
However, if you do not have the required credit score or documents required to get a small business loan, then a cash advance is an idea worth exploring.