Although merchant cash advances have facilitated the prosperity of many businesses, some haven’t been as lucky. Like all funding options that need repaying, a MCA can make or break your enterprise.
For instance, if your retail business is in need of immediate cash flow, a small business loan could help you get back on your feet. It’s quite easy, if you’re short of funds and your enterprise is making consistent monthly sales, applying for a merchant cash advance could add even more help alleviate the strain to your financial situation.
A MCA is not a loan, but an advance on your future sales. To repay it, the provider will take a small percentage of your business sales daily, based on your previous months bank deposits. One of the MCA’s biggest advantages is that you won’t be paying large sums at once every end of the month, so the repayment doesn’t bleed out your savings account. Merchants with strong sales never really notice the daily withdrawals.
However, cash advances typically come at a higher cost to the borrower, because the provider takes on greater risk than that which a traditional bank would incur with issuing a loan. A smart merchant should, therefore, apply for a MCA only when the need arises.
But how do you know for sure, that the advance will be beneficial, and not detrimental to your business? Here are three crucial things to think about before applying for a MCA.
- How MCAs work
Cash advances are not defined by the same regulations as a bank loan. For starters, instead of interest, a MCA has a factor rate, which a provider comes up with, based on a borrower’s risk. If you’re getting a merchant cash advance with bad credit, for example, your factor rate will be high to correspond with the high level of risk.
In addition to repayment rates, MCAs often include other fees, which may vary, depending on the lender. To avoid hidden fees and overcharges, do enough research to find a fair and transparent provider.
Lastly, because the amount you remit will be contingent upon your cash flow, the flexibility of an advance can be significantly beneficial to your business. Unlike other funding options, MCAs are adaptable to the unpredictability and seasonality of doing business in the real world.
- The state of your current sales
Cash advances are serviced by the credit card transactions you process every day. Before applying, therefore, track your sales and note down any fluctuations. Ensure your daily income can allow for small withdrawals to repay an advance while leaving enough in your account to keep you afloat.
- The future of your business
No one can ever be sure about what tomorrow holds, but that doesn’t mean being oblivious is acceptable. A proper study of the shakes and shifts of your industry will help you to make smart predictions for the future and put your cash advance to good work. Whichever way you spend, whether to boost productivity, hire new talent, expand your operation, or launch a marketing campaign, should be geared towards bringing in future sales.