How To Use Merchant Cash Advances Effectively


It was not that long ago that the only way young entrepreneurs could obtain sufficient working capital to establish a new business was to have wealthy parents or win the lottery – other than saving for many years every dollar they earned from whatever job they could secure after leaving college.

But nowadays there are many other ways to raise working capital.

Angel investors and crowd funding are often quoted as options for high tech ventures or a new business producing a product that is really unique, but these options are rarely practical for more conventional businesses such as a new restaurant, coffee shop or fashion retailer.

For the usual bricks and mortar businesses, securing start-up capital from family and friends is usually the more feasible way to go, and then when sales turnover has reached a reasonable level, merchant cash advances — or MCAs as they are known — can be used to expand the business.

MCAs easier to obtain than bank loans

Merchant cash advances are much easier to obtain than business loans from banks. They do carry higher interest rates, but they are generally paid off much faster than bank loans. And the business does not have to reach as high a level of sales turnover as would be required to successfully obtain a business loan from a bank.

Beyond Merchant Capital, for example, requires that businesses only have achieved and average of $10,000 worth of credit card sales, after having been in business for a minimum of six months, in order to be eligible to apply for a merchant cash advance. For online businesses that use PayPal more than credit card, PayPal itself offers businesses a similar scheme of working capital advances.

The advances are paid off out of future sales, so the repayments vary according to the level of sales. Therefore if the advances are used to increase stock inventories, and that results in higher sales and online store turnover, then the advances are paid off faster resulting in lower interest being paid.

Use for expansion not to cover shortfalls

The repayments that are made for MCAs usually amount to between 5 percent and 20 percent of future credit card sales. This percentage is known as the ‘holdback’ amount and will vary according to the individual circumstances of the business and the policies of the financier.

It’s important that the amount of sales revenue that is not subject to the holdback be similar to what the business would have been turning over if it had not had an injection of additional working capital from the merchant cash advance. Otherwise the business will be facing a negative cash flow and need to know how to manage debt correctly.

Therefore MCAs should be used primarily to expand stock inventories, open new branches, take on new staff or product lines, or any new business initiative that will result in additional sales. They should not be used to top-up working capital shortfalls if the injection of cash does not result in additional sales revenue.

Take advantage of new sales opportunities

Even for more established businesses which may have a strong enough balance sheet and trading track record to secure cheaper business loans from banks, or a business line of credit, there are times when merchant cash advances can be useful.

Applying for a business loan or line of credit can involve weeks of preparation of documentation, and then weeks to find out if the application has been approved. And even after that it may be several weeks more before funds are deposited to the business’ bank account or the line of credit is opened.

There are times when opportunities to increase sales revenue are dependent on the business being able to have immediate access to additional working capital. That’s where MCAs shine because applications for MCAs can be made online and most financiers offering these types of cash advances will process applications within 48 hours.

Apply for an MCA before it is needed

An effective way to determine whether merchant cash advances are the right type of financing for any particular business is to apply for the first advance before it is needed. That may sound somewhat paradoxical, but there’s a good reason for that.

By making the application when the business is not short of cash, it is more likely that the application will be approved. The funds can be used to support a short term sales campaign, a new product line or a new item of equipment, and then whatever additional revenue is generated from that new initiative can be tracked to ensure that the advance resulted in additional profits after taking account of the interest built into the repayments.

Thus by making application at a time when finances are not being stretched, and the business is in a period of a normal trading pattern, the business owner will be able to measure the usefulness of the injection of additional working capital and the impact on the business’ profitability.

Another reason for making an early application is that the first time a business makes an application for an MCA, it will need to submit a certain amount of accounting documentation, including credit card statements, to enable the finance provider to determine the financial health of the business and the capacity of the business to handle the MCA repayments based on its credit card sales.

Once that has been completed, and the business has paid back its first MCA, the process of application the second time will be much faster because it will already have an established relationship with the finance provider, and will only have to update its credit card sales records.

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