As a small business, accessing capital to finance a growth strategy can be challenging. Bank loans are often difficult to get and come with tough terms, and getting financed via friends and family can result in more pain than gain.
One solution is a Merchant Cash Advance (MCA) – a loan that is paid off out of future sales.
Many wonder if they actually work to begin with, and more do ask if they’re even worth it. Well, worry not – we’re about to answer all of your merchant cash advances questions.
What are merchant cash advances?
In case you missed it, merchant cash advances are small cash loans that are paid off through future sales. They are a neat way for small businesses to get loans to help them progress and grow. They are short-term and, although they have high interest rates, they are generally paid off faster than business bank loans.
Merchant cash advances are not to be used to plug gaps in cash flows, but instead are meant to be applied as a means to grow a small business and invest in its future. Ultimately, they are flexible and adaptable to a small business’ needs and wishes, working to make it easier to get one’s business to the next level.
How do merchant cash advances work?
Merchant cash advances work almost as an injection of funds, boosting the business and bank balance at the same time. The injection of cash is meant to allow a business owner to invest in stock or resources to scale sales. As sales increase the loan is paid back out of future cash flows.
Like any loan, you have to apply for merchant cash advances – and you have to make sure your business is ready for it. You will be required to provide bank statements, forecasts and lots of other financial statistics to instil confidence in the business from the MCA provider.
Remember that your loan is more likely to be approved if your business is experiencing a normal, steady financial period and is well out of the red. While it’s not necessary to be making a real fortune, the business will need to be financially healthy for the merchant cash advances to work.
Once you have your loan approved, they work pretty simply. Your advances are paid off in future sales and your repayments vary according to the level of sales the business achieves. This means that if advances are used to increase stock inventories and you have a greater sales turnover, then the loan with be paid off faster. Faster pay-off is also rewarded with lower interest, which is obviously a win for any business, regardless of size.
Remember to apply earlier than you need the merchant cash advances for the first time as you will need to provide considerable documentation. This way, you have set yourself up very well for a loan.
Do merchant cash advances actually work?
So far, so good, right?
Merchant cash advances can seem too good to be true for small businesses but they are true – and, you’ll be pleased to know, they do work.
Seeing as merchant cash advances act as a cash injection to a small business, you have surplus money to invest and spend on any area of the business you wish. Once you’ve done this, the repayments made for merchant cash advances account for around 5 – 20% of future sales until they are paid off.
Merchant cash advances work in practice also because they can increase a business’ profitability and its ‘investability’ factor. Think about it: if you have more money to spend on growing a business, it immediately becomes more attractive to investors as you can execute ideas and secure funding from elsewhere too. It also boosts your bank balance, meaning that any prospective investor will be happy to see that you have a healthy sum of money there, contributing positively to the chances of investment.
As well as this, the practicality of merchant cash advances is significantly boosted by the fact that once you have secured your first MCA, it is much easier to secure your second. It’s that age-old scenario of getting your foot in the door as you’ll have built up a relationship and trust with whoever it is providing you with the loan. So, they are more reliable than those chipping in, say, every quarter, via crowdfunding and are kinder than the bank when it comes to re-applying for your second loan.
Our judgement overall
Overall, we would say that merchant cash advances work well and that they are certainly effective for small businesses.
Acting as a periodic boost which can increase profitability, growth and chances of investment, these small business loans are worth it.
Merchant cash advances are better and more reliable than other forms of early stage finance, like crowdfunding and searching for an angel investor, and are great even for more established businesses with very healthy numbers on their spreadsheets too.