Is a merchant cash advance a good idea?

Henry Baker

Thursday, 10 September 2020

If you’re looking for a fast, flexible solution to cash flow issues or short-term projects, a merchant cash advance (MCA) could give your business that extra breathing room it needs.

With an MCA, you have the freedom to fund just about anything for your business, including things like:

  • New or used equipment
  • Marketing material and campaigns
  • Additional cash flow for seasonal fluctuations
  • Hiring of new employees
  • Renovations
  • Purchasing inventory and stock

How does a merchant cash advance work?

An MCA, also known as a cash flow advance, is a unique type of finance best suited to businesses looking for short-term cash flow solutions.

With it, you’ll get a lump sum upfront and pay it back over time with interest, on a flexible repayment schedule.

Instead of making consistent monthly repayments as with a regular loan, you’ll pay your advance back with a percentage of your future EFTPOS sales.

For this reason, MCA’s are great for those in retail or any business who regularly makes card sales.

They also come with repayment flexibility aligned with your business’ sale rate. There’s no fixed repayment term or schedule, because your lender is taking a percentage of your sales rather than a set dollar amount.

This means there’s no pressure to make repayments when your business is tight, and vice versa—if you’re smashing out sales you’ll pay your MCA back sooner.

This flexibility is especially useful for businesses with seasonal fluctuations as repayments are aligned with your cash flow.

A merchant cash advance example: Georgia’s Boutique

Here’s an example of how a merchant cash advance works:

COVID-19 leaves Georgia, the owner of a boutique homeware store, unable to keep up with a spike in customer demand.

She’s not only seen an influx of new customers (looking to redecorate their homes during the pandemic) but delays from many of her usual suppliers.

She’s found a new local supplier to help her keep up with demand, but they charge double the usual amount Georgia pays.

She doesn’t have enough cash flow to support this new expense, so she decides to take out a merchant cash advance.

She quickly receives a lump sum of cash in her account (a total of $50,000 with a factor rate of 1.25%) to pay her new supplier and fulfil orders. Including interest, she owes $62,500 in total and will pay her loan back with 10% of her daily EFTPOS sales.

Georgia generates a daily average of $1000 through card sales, so this equates to paying back $100 of her merchant cash advance per day.

Based on these figures, it should take her just under 18 months to repay her MCA.

If her card sales increase, she will pay it off sooner but regardless of how quickly she pays it off, the rate does not change and she will always owe $62,500. This, along with the flexible repayment schedule, gives Georgia peace of mind.

How much does a merchant cash advance cost?

Lenders charge a ‘cost of capital’ fee for merchant cash advances, which usually falls between 1.1x to 1.4x the amount you borrow.

For example, if you borrow $100K, your total repayments might be between $110K to $140K.

Although a merchant cash advance is more expensive than a traditional business loan, it can be approved quickly without collateral.

This is because merchant cash advances are unsecured, meaning you don’t need to provide any assets (like a property or vehicle) upfront to your lender for security.

Instead, your MCA is secured against your business’ future card sales. Just be aware that if anything happens to your business down the line, you’ll need to find another way to repay your MCA.

Other benefits of a merchant cash advance

You can pay your lender back on more flexible terms (at the pace of your business and dependent on the number of sales you’re making) and be certain that your interest payments will not change. They are set in stone.

This means two things: your cash flow is more likely to remain stable and, if you’re having a slow month, you don’t need to worry about how you’ll repay funds while keeping your day-to-day operations running smoothly.

How quickly can I get a merchant cash advance?

Merchant cash advances can be approved in as little as two hours.

Paperwork is kept to a minimum as well, making an MCA an attractive option for business owners who want fast access to cash.

While secured loans generally come with lower interest rates, they can take months to approve—not ideal for businesses who need funding quickly to solve unexpected problems.

When is a merchant cash advance a good idea?

To find out if a merchant cash advance is a wise move for your business, it’s best to chat with a lending expert to better understand your options and find a funding solution that makes sense for your individual case.

It takes just two minutes to get your instant quote, based on your business’ current situation.

But to give you an idea, some businesses find a merchant cash advance helpful if:

  • They experience seasonal fluctuations
  • They’re in retail or regularly make sales via EFTPOS
  • They have faced an unexpected shortage in cash flow or need a fast solution
  • They don’t have access to assets for security

Comparing merchant cash advances

If you think a merchant cash advance could help your business solve a short-term problem or fund a new growth project, it’s time to compare your options.

Rather than going with the first lender or rate you come across, comparing merchant cash advance facilities can save you hundreds or even thousands of dollars down the line, just by taking a few minutes to compare products with our free loan finder.

Get your instant quote today, based on our analysis of products from 80+ leading Aussie lenders.

Henry is a Senior Product Specialist specialising in working capital solutions. He loves helping entrepreneurs achieve their growth goals and getting to know their businesses in-depth, in order to find the most fitting product for their needs.

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