Merchant cash advance is a scalable and flexible mode of financing. It enables business managers and small business owners to raise finance without meeting complex and extensive procedural formalities.
Merchant cash advances can be quite useful for businesses that need funding on an emergency basis. It can be equally useful for businesses that do not have an expensive asset to offer as collateral.
In this article, we will explain exactly how a merchant cash advance can help small businesses go from surviving to flourishing.
What Exactly Is A Merchant Cash Advance?
In short, a merchant cash advance is when a business sells future receivables in exchange for cash instantly.
Fast Access To Cash Can Be A Lifeline For Small Business
Merchant cash advance enables fast access to cash. The business receives a lump sum payment at once.
In exchange for this lump sum, funds are deducted from future business revenue earned via business revenue. So, if future revenue is higher, a deduction will be higher and vice versa.
Further, it’s important to note that fast access to cash can be a lifeline for small businesses.
It’s worth noting per a survey report from the World Bank, 82% of small businesses fail because of cash flow problems; not lack of profit. Hence, same-day financing in the form of merchant cash can be an extremely logical choice to save the business.
Flexible Funding Is Effective In Meeting Business Cash Needs
Repayment is agreed as a percent of sales. It means the repayment amount is flexible and varies with sales. Hence, the business owner does not need to worry about declining revenue and cash forecast.
Further, an expected increase in product demand requires increased production. The increased production comes with higher working capital needs and requires quick financing. This can be effectively achieved with financing options like a merchant cash advance. Let’s delve into the benefits of MCA funding.
· Scalable Funding
In MCA, the scale of funding changes with the change in revenue. So, if your business is small, your finance needs are expected to be limited. However, if your business is large, you may have extended needs for financing.
In other words, small businesses are expected to have limited potential to generate revenue. So, their ability to raise finance via merchant cash advance is limited. However, it can be extremely helpful in growing the small business by adding quick resources to the system.
Likewise, it can be a logical choice for businesses with seasonal fluctuations that need to make-up, temporary cash flow problems.
· No Collateral Required
The lender does not require collateral for approving a merchant cash advance. Instead, repayment is guaranteed against the future stream of revenue.
So, merchant cash can be equally important for businesses with no assets to offer as collateral. Although, a personal guarantee may be required to protect the lender if the business cannot afford repayment.
· No Usage Restrictions
Proceeds raised under MCA can be used for any business purpose. You are free to use it for working capital, acquisition of fixed assets, payment of salaries, purchase of inventory, and fulfill any business needs.
However, MCA should only be raised once you have urgent financial needs.
· A Viable Option For Small Businesses To Raise Finance
Generally, small businesses do not have an extensive length of credit history, resulting in lower credit scores and lower chances for the approval of traditional loans.
On the contrary, MCA does not require higher credit score and the approval process is short and fast. Hence, MCA can be a viable option for small businesses to raise finance quickly.
Why do small businesses consider MCA?
Small businesses usually consider MCA to meet working capital requirements. Including:
1- To meet marketing and advertising expenses.
2- To meet some unforeseen/unplanned expenses.
3- Covering shortage of cash due to receivables.
The logic behind using MCA for marketing purposes is expected increase in sales/profit of the business. Hence, advance can easily be repaid with the increased revenue.
Similarly, there is no other financing option as quick as MCA. Hence, it’s the best solution to fulfill unexpected finance needs. Likewise, the shortage of cash flow due to receivable collection is temporary. Hence, it can be good to use MCA for such financing.
However, the cost of merchant cash advance is slightly more than other modes of financing. So, it should be used when there is some urgent need for finance.
A merchant cash advance can be an excellent way to raise finance for meeting short-term business needs. It’s flexible and scalable in terms of getting fast access to financing. Further, no physical collateral is required, and there is no usage restriction.
It means finance raised via MCA can be used in any business activity. Likewise, there is no fixed repayment like a traditional loan. So, the business does not need to worry about cash forecasting.
MCA is specifically useful for small businesses as they are not expected to have a long credit history. So, their credit score is expected to be below.
Hence, it’s difficult for them to raise finance via traditional channels. On the other hand, MCA is available for small businesses without requiring longer credit history and higher credit score.
Usually, businesses use MCA for different business purposes that include meeting marketing expenses, meeting unforeseen expenses, and covering the shortage of cash due to receivables. However, there is no restriction on the usage of finance raised via MCA.
So what are you waiting for?
Frequently asked questions
Why is a higher credit score not required for a merchant cash advance?
The repayment of MCA is made via future revenue stream. So, it’s a form of collateral. Hence, a higher credit score is not required.
How much time does it take to raise finance via MCA?
The process of application and approval is fast for MCA. Usually, it takes a few hours to raise the finance.
However, it might take some more time due to procedural formalities in some of the cases. Overall, the time required to complete MCA is short, and the process is fast.
Why should small businesses use merchant cash advance?
Small businesses use merchant cash advance due to the following distinctive features.
1- Easy and fast access to cash.
2- Flexible repayment structure – repayment changes with changes in revenue.
3- A viable option for businesses with a lower credit score.
4- Scalable funding option.
5- Viable for small businesses.