Offering instant access to working capital, the merchant cash advance (MCA) represents a crucial lifeline for small businesses. The cash advance is, however, a more expensive source of business funding than a commercial loan. Is the quick turnaround worth the extra cost? In many cases, the answer is yes. Here's a look at five scenarios which favor the MCA over a traditional small business loan.
The Merchant Cash Advantage
Commercial loans have two major strikes against them: they have a long turnaround time and are increasingly difficult, if not impossible, to come by. For businesses facing emergencies or time-sensitive opportunities, bank loans are neither reliable nor fast enough to offer a benefit.
Merchant cash advances, by contrast, streamline the application process and offer access to business funding within a week or two. Though this service costs more, the benefits of instant cash often make the bargain worthwhile.
Five Ways Businesses Win with a Merchant Cash Advance
A merchant cash advance is typically the best choice in the following scenarios:
1. Taking advantage of a time-sensitive opportunity. Agility is a requirement in today's fast-paced business environment, especially for small businesses trying to compete with larger players. When opportunities arise, small business owners have to act quickly or risk missing out.
In this case, the benefits of quick turnaround outweigh the cost of the cash advance. One major MCA company offers the example of a retail store faced with an opportunity to buy merchandise at a steep discount--provided it pays cash. The business may apply for a cash advance of $20,000 and make $50,000 in retail sales--well worth the cost of the capital (which this provider estimates at $5,000).
2. Managing rapid growth. Strong consumer demand may spark business growth, but it takes smart financial decisions to sustain it. Companies growing quickly need ready capital in order to manage their expansion. For example, a business facing rising or unexpected demand will want to ramp up capacity immediately rather than waiting for customer payments to come in first. A merchant cash advance enables the business owner to strike while the iron is hot.
3. Handling an unforeseen event. A less favorable circumstance, but one no less in need of a sudden cash infusion, is a financial, physical, legal, or natural emergency. Businesses face unforeseen events all the time. Some examples include:
- Property damage
- Equipment malfunction
- Fire or natural disaster
- Lawsuit
- Tax audit, fine, or a higher-than-expected tax burden
- Regulatory compliance issue
Small businesses may also use a merchant cash advance to compete more effectively against a competitor who has just opened a location nearby or has begun offering a popular service or product, drawing customers away.
4. Escaping from a financial pitfall. Businesses can easily justify the cost of a MCA when a financial circumstance threatens a much higher cost burden. Examples of these financial pitfalls include:
- Loan revolvers that trigger compound interest, transforming a manageable loan into a high-cost obligation
- Investors pulling out of a financial commitment
- High fees
5. Leaving credit out of the picture. A merchant cash advance application takes into account the business' past performance (as reflected in credit card receipts), not the business or the merchant's credit history. Unlike a commercial loan, the MCA transaction doesn't require collateral or good credit.
The Bottom Line for Business Funding
A merchant cash advance is not always the cheapest path to cash, but it's the most efficient and hassle-free. The quick turnaround enables small business owners to act immediately, either to take advantage of a profit opportunity or to control damage from an unforeseen event.
Sources
Advance Me, Inc.
Smart Small Business Loans