- Lower Interest Rates – A business line of credit typically carries under 8% annual interest, making it a cost-effective way to pay off expensive credit card (17%) and MCA (15-45%) debt.
- Strategic MCA Payoff – Paying off a Merchant Cash Advance (MCA) with a line of credit makes sense if an early payoff discount applies or to switch from frequent payments (daily/weekly) to monthly payments.
- Easier Approval Process – Expensive debt (credit cards, MCAs) does not heavily impact line of credit approvals, making it a viable option even for businesses with existing financial obligations.
The interest rates for a revolving business line of credit are usually under 8% annual interest, so using this cash can be a great way to save interest on more expensive business debts. If your business is shouldering expensive credit card and/or merchant cash advance debt, a line of credit is a great way to save money on interest payments.
For example, if your business has credit card debt with interest rates anywhere north of 10%, paying this off using funds from the line of credit means that now the debt payments will be absorbed by the line of credit. On average, American small businesses see an average annualized interest rate of 17% for their credit cards, with an average balance of about $40,000.
Even more expensive than credit card debt is Merchant Cash Advance debt. The cost of these MCA’s are anywhere between 15% to 45%, which is not annualized, just calculated as simple interest. Now on the surface, taking this expensive debt and paying off with a line of credit sounds like a great idea. The issue here may be that since the interest is frontloaded, meaning you have to contractually pay off the end amount, it may not make sense to pay off this debt. Exceptions to this general rule of thumb are as follows:
- When you originally received the MCA, you may have negotiated an early payoff discount. This means that the simple interest would be discounted if the advance is paid off within a certain timeframe (usually anywhere from 0 to 90 days into the payment schedule). This means that if you received the MCA fairly recently AND have an early payoff discount, using a Line of Credit is a perfect way to save cash.
- MCA’s are repaid on a weekly or daily basis. This fast repayment schedule usually doesn't help the cash flow ebbs and flows of a small business. If you were to payoff the MCA debt with a Line of Credit, then you won’t have to pay daily or weekly, but only pay the line of credit payment, which is monthly.
One of the best things about the approval process for a revolving business line of credit is that more expensive business debts aren’t weighted heavily in the application process. So even if your business has a large amount of credit card or merchant cash advance debt, you have a great likelihood of being approved.
