Used strategically, a merchant cash advance can be a critical resource for business growth. Misapplied, the MCA can drain future earnings. The following practices help businesses make the most of this powerful funding resource.
How to Take Advantage of a Merchant Cash Advance
MCA companies are the first to admit that this type of commercial funding is not right for every business. As one leading provider explains, merchant cash advances are powerful tools when used "for the right purpose and under the correct conditions." Business owners can make sure they use MCA funding to best advantage by following these steps:
1. Understand how MCA funding works
Merchant cash advances are instant infusions of working capital. Unlike small business bank loans, MCAs are easy to qualify for and work on a quick turnaround. With funds available in a matter of days, businesses rely on advances to jump on a time-sensitive opportunity or to rescue the business in a pinch. Unlike commercial loans, cash advance funding sells upfront cash in exchange for a portion of future credit card receipts. This profit-sharing structure has benefits for business owners: rather than pay a fixed monthly amount on a loan, the monthly debit amount fluctuates according to the business' success. The ultimate cost of the advance, however, typically exceeds the cost of capital from other sources such as small business bank loans.
The structure of merchant cash advance funding works best under certain business conditions. If a business owner can take advantage of the capital instantly and achieve a return in excess of the MCA's cost, an advance can pay for itself and yield a healthy return.
2. Evaluate business needs
Does the investment project justify a MCA? Since a cash advance generally costs more than other types of business funding, it's important to assess the value of the investment. To decide whether a proposed investment is MCA-worthy, ask: Will a cash advance rescue the business? Will quick cash now offer a strong return down the road?
Good uses for a MCA include:
- A marketing campaign to tap a new customer base or reposition the business in response to market changes.
- Repairing or replacing critical equipment.
- Purchasing inventory at a volume discount.
- Purchasing inventory or equipment from a liquidator.
- Remodeling the business premises.
- Expanding the business to a new location.
- Attracting a new employee.
- Rescuing the business from financial trouble.
- Managing fast growth,
3. Assess other forms of business funding
Merchant cash advances are quicker and easier to manage than other forms of capital. But they do come at a higher cost. If the intended investment is not time-sensitive, business owners will want to take into account other business funding options.
Alternative sources of merchant funding include:
- Commercial bank loans
- Equity investors (selling ownership stakes in the company)
- Private loans from friends or family
- Asset sales (equipment, etc.)
Each form of funding has different advantages and disadvantages. Credit-based funding such as bank loans might offer a lower cost, but require a strong credit history and lien-able collateral. A merchant cash advance is technically an asset sale rather than a credit transaction, since the MCA provider buys future credit card receivables at a discount. This type of funding generally makes sense for businesses in volatile or cyclical industries, which demand quick and agile investment actions. MCAs also appeal to businesses that don't meet the credit or collateral requirements for a commercial loan.
Costs, Benefits, and an ROI
With a clear view of business funding options and investment needs, it's easy to estimate the ROI of a merchant cash advance. Using past credit card receivables as a guide, business owners can estimate the total cost of a cash advance, and compare it against the expected return on an investment--cost savings on an inventory purchase, for example. If the benefits outweigh the costs, a merchant cash advance may offer the best business advantage.
Sources
AdvanceMe, Inc, Merchant Cash Advance: Not for Every Business. Is it Right for Yours?
Focus, The Changing Face of Merchant Cash Advances
Merchantcashadvancefast.com, Getting the Most from Your Merchant Cash Advance