“Revenue is vanity, profit is sanity but cash is king.”—unknown
“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”—Peter Drucker, management consultant, educator and author
“There is really only one way to address cash flow crunches, and it’s planning so you can prevent them in advance.”—Elaine Pofeldt, writer, editor and author of The Million-Dollar, One- Person Business
The thread running through all those quotes is that having cash on hand is critical for any business. But what can you do as an owner if you’re a little short? You have options, including small business loans and working capital loans, but today we’re focusing on merchant cash advances (MCAs), providing answers to the questions below so you can determine whether an MCA is right for your business.
What is an MCA? Let’s start by what it is not—a loan. Rather, you’re provided with an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.
How does an MCA work? Since your provider is purchasing your future sales, the traditional way to structure an MCA is for it to automatically receive a daily or weekly percentage of your debit and credit card sales until the advance is paid in full. The repayment period is based on your sales and may range from three to 18 months.
For businesses that don’t rely as much on debit and credit card sales, MCAs can be structured so funds for repayment are drawn directly from your business bank account on a daily or weekly business. The fixed repayment amount is based on an estimate of your monthly revenue.
How do businesses benefit from having an MCA? Businesses benefit from having an MCA by betting on themselves to secure the sales necessary to repay the advance in a timely fashion. There’s no need to put money aside to repay a loan as the funds are automatically taken as sales are made.
What are the pros and cons of as MCA? It’s important to consider the pros and cons of an MCA before moving forward to apply for one. The pros include:
- Speed—It’s a way to quickly get the money you need for your business, often within 24 hours of being approved.
- Flexibility—Physical collateral is typically not a requirement nor is a stellar credit score. Providers may work with businesses with bad credit, startups or previous financial difficulties as they will focus on debit and credit card transactions or business revenue.
- Adjustable repayments—Your payments will adjust based on how your business is performing—less when sales are down and more when they’re up.
Of course there are some cons to consider, including:
- Expense—MCAs are one of the most expensive forms of financing, with APRs that can reach 350% depending on the size of the advance, fees, time it takes to repay and business revenue.
- Frequent repayment and debt cycle danger—Because payments are deducted from incoming sales, your cash flow can be seriously affected and you may be trapped in a cycle of debt it’s hard to escape.
- No early repayment benefit—Unlike traditional amortizing loans, you can’t save on interest by repaying early; you have to repay a fixed amount of fees no matter what.
- Confusing contracts—Some MCA agreements are unclear and hard to understand, and since APRs aren’t typically provided, it’s hard to compare this type of financing with your other options.
- No federal regulation—MCAs aren’t subject to federal regulation but regulated by the Uniform Commercial Code of each state. This can make it easier for scammers to operate—trying to take advantage of business owners.
Which industries typically use MCAs? MCAs are best for small businesses that need some extra money to be more competitive and generally more functional. They may also be a good idea for small businesses just starting out that want to make ongoing upgrades. MCAs are popular with restaurants and retailers that often don’t qualify for traditional bank loans.
Wondering if an MCA is right for your business? Contact Clear Skies Capital today at 800-230-9822 to discuss your financing options.