How to Fuel Your Business with a Merchant Cash Advance
It’s 11 p.m., and your car’s gas tank is almost empty as you drive along a deserted stretch of Route 66. Up ahead you see the gas station lights. As you pull in, you see the price is $3.50 per gallon for fuel, about $0.50 more per gallon than your last fill-up.
Are you going to drive by the last available station? Or are you going to fill the car’s gas tank and continue your cross-country road trip? You’re going to fill up. Gasoline for the car’s engine is crucial to getting you to your destination.
Small businesses have similar situations. As the business owner, you need capital to grow, to meet customer demands and to fuel growth drivers like marketing, additional personnel, and inventory. You need cash to accommodate your 45-day lag time on receivables. Small businesses are always in a growth situation. Capital is the fuel. But unlike a car that stands still without gasoline, a company without capital will start to die. You, as the owner, will be headed toward your exit strategy if you don’t have money.
Why Merchant Cash Advances are a Great Idea
A merchant cash advance (MCA) is an advance payment against future income. Importantly for the small business owner, a merchant cash advance is not a loan.
Key advantages of MCAs include:
- Quick access to funds. Usually, within 24 to 48 hours after your request,
you’ll receive a lump sum payment. MCA providers start determining your
funding level by reviewing three months of business receipts. Then they
use a ratio, typically 1 to 1.5 months of deposits to calculate the amount
you’ll receive as an advance.
- Easy application process. You can apply for a merchant cash advance
online; upload required documents such as bank statements, and
- No underwriting or collateral. Since MCAs aren’t loans, you don’t need
to have collateral like real estate or other substantial assets to get access
- Payments can be tied to a percentage of receipts. If the MCA repayment
plan is based on a percentage of income instead of a specific amount, you’ll
have lower payments when sales are down. Your cash flow won’t be unfairly
hit during ‘off’ weeks.
- Credit scores don’t need to be perfect. If you’ve been in business for a
reasonable amount of time and have consistent sales, the MCA provider will
overlook a less-than-perfect credit score.
Planning is Key to Making MCAs work for You
In our lead story, you were willing to pay more for gas because you needed the fuel to keep going on a dark and desolate road. Similarly, you will pay more for the fast cash from merchant cash advances. How much more? Interest rates can range from 20% to 40%. It’s expensive money.
But you can make MCAs work with planning.
- Reserve some of the advance for repayments. MCA lenders will make
daily or weekly withdrawals from your bank account as repayment on the
advance. Retaining a portion of the advance in the bank to make
payments protects your existing cash flow and keeps you on a healthier
path toward growth.
- Recognize MCAs are short-term solutions. Whether the MCA fuels
growth until receivables arrive or resolves a problem, plan to use the
funds as a stop-gap until normal cash flows return. Repayment schedules
average 4-6 months
- Avoid multiple MCAs. If you spend all the funds from the initial advance
and run out of cash, you may be tempted to take another MCA to repay
the first one. This action can be the start of a vicious cycle. Taking an
advance to pay for an advance doesn’t support your business. Continuing
to take multiple MCAs is called ‘stacking.’ Your business becomes focused
on paying back advances, and you begin playing a dangerous game you
Uses for a Merchant Cash Advance
MCAs can fund a variety of growth tactics, including the following:
- Buying new equipment. Keeping pace with bakery orders is easier with
additional ovens or more modern technology.
- Add to inventory. If adding two new pack-sizes to your assortment brings
in 10 more customers, then you’ve put the MCA to good use.
- Open a second location. When your analysis shows you can support a
satellite office in the next county, the MCA can help cover the start-up cost.
- Build your team. If you decide to offer regular happy-hour promotions in
your restaurant, use part of your MCA to hire bartenders and staff to keep
up with demand.
- Increase marketing activities. A merchant cash advance can fund digital
advertising, new signage, or packaging redesigns to attract more customers.
- Handle the unexpected. The company van breaks down. Your color printer
stops working two days before your largest order is due. The MCA funds
can keep your business running on time and in full.
- Meet seasonal demands. A chocolate store’s cash flow in late September
may not be enough to buy ingredients for the Halloween season. A merchant
cash advance supports the uptick in growth, and when used to satisfy
seasonal cravings, can help with customer retention.
- Pay existing debts. If the bills are due, but cash flow is slow, and receivables
aren’t available, the MCA can help you preserve your credit rating and avoid
While merchant cash advances have a high-interest rate, with proper planning, the value of the cash will produce far more than the extra cost of interest. Fuel your growth with a merchant cash advance — just manage it carefully so you don’t get burned.
If you’ve found yourself mis-using the MCA option and are now facing unsupportable debt or strangled cash-flow, your best option is most likely a full debt workout through a qualified business consultancy with rock solid experience in re-organizational strategies. It’s imperative you explore this option before bankruptcy, which is most often not in the best interest of the business or the owner.
Over the past 10 years, Second Wind Consultants has saved thousands of businesses from bankruptcy and unsupportable business debt. To learn more about how a true debt work out, like our RISE program (Re-organization, Insulation, Strategic Elimination) can help, contact us now!