Maintaining a positive working capital is advisable for all businesses. However, more often than not businesses find themselves grappling with cash flow issues. Accrued receivables being one of the elements to be blamed for in these situations. If a business is not able to recuperate their receivables on time and yet have to keep paying the fixed costs of rent, utilities, salaries and cost of production, they soon find themselves swirling towards cash strapped weeks in the future.
To avoid this from happening and ensuring smooth cash flow to ensure continuous operations, businesses often seek short term loans to keep afloat. Loans, however, come at high-interest rates, with the need to sign in collaterals and the entire process might take a long time.
This is where merchant cash advance comes in. A small business financing method that is easy to procure and pay off but also comes with its set of cons, much like all other kinds of financing.
In this article, we will discuss the pros and cons of a merchant cash advance, as well as what makes it such a swift tool to fund short term capital requirements.
The first thing to understand about Merchant Cash Advance (MCA) is that it’s not a loan. Unlike traditional lending, MCA is a clear advance given to the business against its future sales. This is why MCA is best for B2B arrangements or retail or restaurant businesses that primarily entertain debit and credit card sales. This is also the reason why it’s easier to receive an MCA as against a loan, as the borrower is not judged on their creditworthiness but by the number of sales they have been making and cash flow they have been seeing in the past few months.
Business owners who opt for a merchant cash advance, receive upfront funding against their future credit or debit card sales. There are two ways in which they can choose to repay the amount.
The amount repaid, every day or every week comprises the principal and the fee that is deducted directly from the Automated Clearing House, referred to as ACH withdrawals.
ACH advances have now enabled businesses that do not use credit or debit card sales to enjoy the benefits of merchant cash advances as well.
If you are a small business owner who is considering an alternative credit option for your business, then a merchant cash advance might just be the right option for you. However, before making the call, it’s best to find out if it’s truly the best option for your particular business.
MCA allows fast access to funds in as little as 24 to 48 hours. All that applicants need to do is submit the cash flow statements for the previous few months and the amount will be credited to their accounts directly upon approval. This is a big plus for small businesses that are trying to plug in cash crunches during limited time frames.
Unlike loan repayments, MCAs don’t need to be repaid in fixed sums, rather borrowers only need to repay a fixed percentage of their daily sales. So, if a business is going through a slump, then an MCA could be a better option as they are only to pay a certain percentage of the sales, irrespective of how high or low the sales volume is.
One of the reasons most small businesses don’t qualify for short term loans is because of their credit scores or the lack of it. The good thing about MCA lenders is that they are not looking for a credit score, rather all they need to see is how the applicant’s business has been doing over the last few months. They ascertain this with the help of the bank statements and cash flow statements of the applicant and zero down on the fee based on the same. Therefore, a new business or one with a bad credit rating can apply for an MCA, as well.
The price of easy and immediate funding is expensive. MCAs have been known to have annual percentage rates as high as 350%. However, businesses that are in dire need of finances and are confident that they will rebound and pay back the principal and fee in full through their future sales often do choose MCA as their choice of alternative funding.
MCAs, to ensure full repayment, might have small businesses only allow card payments (since the amount is charged from the ACH) and not entertain cash payments at all. Also, they might not allow businesses to take a break or close for a while, as this might impact their repayments. These are pointers that every business should consider before opting for an MCA.
MCA is more of a stop-gap arrangement and in no way should it be treated as a long term solution. If a business keeps shelling out its revenues (aka profits) over a long period, it will impact its growth which is not good for any business.
Although the merchant cash advances market is a highly unregulated one, fintech has helped bring more MCA lenders into the market which means more options for businesses to choose from. The newer MCAs are being fuelled by the merchant cash advance software that has helped automate merchant cash advance lending servicing by digitizing and streamlining the process. So, borrowers can now go through the entire lending process seamlessly by just using a device connected to the internet. A no-hassle, quick stopgap funding arrangement for business owners. However, if it is the right option for them or not is one they need to figure out based on the pros and cons of merchant cash advances. Don’t think MCA is the right solution to your funding requirement? Here are some alternatives to MCAs that you can consider.