If you’ve researched lending and borrowing options for your business, you’ve likely come across merchant cash advances (MCAs). This newer form of lending has many positive aspects that can help business growth. However, it also has some downsides that need to be considered carefully.
When used properly, an MCA can provide your business with the cash it needs to quickly scale and leverage opportunities that arise. When used poorly, however, you can quickly become swamped in daily payments that drain funds from your other business operations. This means you must use an MCA strategically to gain the most benefit.
To help you understand merchant cash advances and use them to the fullest, we’ll outline the key strategies for using an MCA for growth and expansion.
Merchant Cash Advance Basics
Before discussing the strategic uses of a merchant cash advance, it’s essential to fully understand how they work since they are quite different from traditional lending options.
To begin with, an MCA is a high-interest, short-term loan. This means the cost to borrow the money is generally higher than that of other products like an SBA loan or business line of credit.
The factor rate determines the cost of an MCA. A factor rate is a number between 1.2 and 1.5, by which the amount you borrow is multiplied. This gives you the total cost of the loan.
For example, if you borrow $50,000 with a factor rate of 1.25, your total amount to pay back is $62,500.
With an MCA, you don’t make regular monthly loan payments until the amount is repaid. Instead, a daily percentage of your credit and debit card sales is automatically deducted. The percentage can vary, but these are automatic deductions from your merchant account.
Sometimes, a fixed ACH withdrawal can be arranged if your business has good cash flow but few credit card transactions.
Because of an MCA’s unique nature, strategic use of the loan is more important than a traditional loan. Without careful planning and solid use of the funds, paying back the loan can significantly impact your cash flow and business operations.
In the next section, we’ll go over typical strategies for using an MCA so you can avoid any pitfalls.
Scalability And MCAs
Many business owners consider using a merchant cash advance to expand their business. However, to make more informed decisions in this area of your business, you want to consider the difference between strategic financing for growth and scaling before making this move.
Growth and Expansion
Growth or expansion is when a business builds up without a direct focus on profitably in the short term. The goal is to expand and take on debt so that profitability comes at a point in the future.
In these situations, you want to use traditional business loans or raise capital through investors since business growth strategies generally involve delayed profitability.
Use other lending options because an MCA is a short-term loan that requires immediate profitability, so the repayments don’t harm your business operations.
Scaling
The better option when using an MCA is for scaling efforts. With scaling, the goal is to take an existing successful business model and simply scale it up. Costs, revenue, and profits all scale equally, so the money you invest is quickly turned into increased profits.
An MCA can be very effective for scaling efforts and is one of the most common strategic uses for this type of lending option.
A perfect example is if you launch an e-commerce store with a unique business model. You have experienced sustained success and have fine-tuned your advertising model for maximum conversions and profitability.
Now, you want to scale your efforts through a more extensive online paid advertising campaign using merchant loans for marketing.
You can fund that advertising campaign with an MCA. Since you are scaling a proven business model, you may begin to see an increase in sales relatively soon after investing the money.
This allows you to pay back the MCA comfortably while still enjoying the benefits of your scaling campaign.
Scaling like this is most common in e-commerce settings but can also work in retail, restaurants, or other physical locations.
An MCA for business expansion and growth can also work, but the expansion should result in rapid profitability.
Starting with a Successful Business Mode is Key
The most crucial factor is starting with a successful business model. The business model must also be one you can scale through a formula you’ve already tested and experienced positive results with. This is the key to using MCAs wisely.
You want to avoid scaling as a test using an MCA and perform smaller tests of your scaling strategy to ensure it will work before committing to a significant investment.
Smaller testing also gives you concrete numbers, allowing you to better calculate your ROI on the money you intend to borrow through an MCA.
Strategic Hiring Using A Merchant Cash Advance
Today, finding the right talent to expand your business is challenging. We are all experiencing a historically tight labor market, and a lack of people can severely restrict your ability to grow or land new clients.
Tight labor markets mean you have to increase your compensation offers. This can strain cash flow; one way to fix that is through a merchant cash advance.
Strategic hiring can help you expand and grow your business, but as with anything, you need to plan carefully. Strategic hiring using a merchant cash advance works best when your hiring will result in new business.
An example is if you operate a landscaping company. Your company is performing well, but you can’t seek out new clients or take on new ones due to a lack of employees.
A merchant cash advance can help you to hire new employees and start servicing new contracts and clients. This brings in new revenue relatively quickly, so you can pay back the advance with little impact on your operations.
Another example is if you operate an IT services firm. In the IT industry, it is notoriously difficult to secure the right talent. Securing the right talent is necessary to offer the services new clients demand, but the job search and hiring process costs money.
A merchant cash advance can also help you with the initial costs of securing talent, allowing you to land new lucrative clients and generate revenue. The key with both these examples is that the new hires will allow you to start generating revenue relatively quickly.
Do Not Get a Merchant Cash Advance Just to Solve Staffing Shortages
If you are just experiencing staffing shortages, a merchant cash advance is generally not the best fit. Filling those general roles immediately may improve your business operations, but they generally won’t lead to revenue growth in the short term.
However, there are exceptions to this. For example, when seasonal workers are needed, and a majority of your annual sales are seasonal, an MCA can be a suitable option to help with cash flow.
Equity funding
Besides retailers, other businesses can also use merchant cash advances strategically to help them with cash flow management. For example, startups can have cash flow issues between funding rounds. During this time, they may need to fund critical business operations but just need a little breathing room until the next round arrives.
A perfect example is if you run a SaaS startup. You may have a good number of subscribers and a solid monthly income via credit card transactions. However, you want to scale your business, but you still have several months until your next round of capital raising starts.
Depending on the rest of your finances, cash flow management with MCAs can help you secure the next round of funding while still being able to scale during the current period.
A SaaS business can provide stable monthly transaction volumes that indicate a successful business model that simply needs to scale up to build revenue and profits.
MCAs Can Help in Times of Waiting So Your Competitors Don’t Steal The Show
Waiting until your next round of funding may allow competitors to enter the space and start taking market share, which will cost even more to win back. So, strategically building your customer base and market share immediately can result in a much higher ROI than just the immediate subscription growth.
In this way, investment capital from MCAs can help bridge the gap between your normal funding. Just be aware that the profitability of your SaaS company will determine if you qualify for a merchant cash advance. Many startups operate at a loss, which is an issue when applying for any type of loan.
However, if you have strong and stable credit and debit card volumes, you can still qualify for a merchant cash advance, assuming the rest of your finances are in a good place.
Overall, applying for a merchant cash advance is relatively fast and easy and most MCA providers only do a soft pull on your credit, so there is no hit to your credit score when you apply.
Unexpected Business Opportunity
If you’re like most successful business owners, you plan out your business moves and investments well in advance.
However, we all know that business opportunities can present themselves at any time. If we don’t have the money to act on them, we can miss out on a great opportunity that may not come around again.
For example, let’s say a local business related to your industry is looking for investors or possibly is going up for sale.
Obtaining partial ownership in a related successful business would fit perfectly into your current business plan. The only problem is you can’t get the funds to invest through a traditional small business loan.
A merchant cash advance can help you get the lump sum of cash you need to take advantage of the business opportunity.
Of course, as with any investment, you must do your due diligence to ensure it makes sense in the short and long term.
However, in many cases, these opportunities are missed simply due to a lack of available capital. A merchant cash advance is just one more tool you can have at your disposal so you never miss out on a business opportunity due to a lack of funds.
MCA For Inventory Purchases
Securing inventory is another common strategic use of a merchant cash advance.
Most commonly, this is used in seasonal situations where a business conducts most of its product or service sales during a specific time of the year and prepares for high-sales periods.
Before this period, the business may have an opportunity to secure its inventory at a reduced price or on better terms than if it waited.
With a merchant cash advance, the business can secure the inventory at a better price and ahead of schedule, creating a profit even after the MCA and all associated costs are paid off.
Overall, MCAs for seasonal businesses are common and strategically work to boost business with MCAs.
Another use case example is if you suspect supply chain issues are likely to arise.
As we’ve all experienced, supply chain issues can leave us with no inventory. Keeping minimum stocks and inventory was fashionable, but supply chain disruptions have changed our attitudes toward that type of thinking.
If regional or global events change, you may decide you want to secure certain inventory to avoid any disruptions. A merchant cash advance can assure that you can secure the additional inventory while other businesses miss out.
Timing MCAs for business cycles and fluctuations in supplies is another strategic use of MCAs.
Overall, managing inventory and supply chains has become a major part of almost every business. A merchant cash advance can help you to better manage your inventory when other options do not exist.
MCA For Emergency Funds
An emergency may not seem like a strategic event, but managing it requires a strategy to minimize its impact on your business.
Every business will encounter some type of financial or situational emergency. This can be due to damage to the property, such as a flood or a fire, or theft or vandalism that leaves your fleet of vehicles unusable for a period of time.
While various insurance policies cover these events, you may need money immediately to continue servicing your customers.
As you wait for insurance payouts and other funds, a merchant cash advance can provide the money you need to continue satisfying your customers.
Emergencies regarding your business can pop up at any time. Strategically using a cash advance to keep your operations running can stop you from losing clients and revenue.
Overall, MCAs are one of the few financial tools for small businesses that can supply cash quickly enough to handle emergencies.
Renovations
Sometimes, a business needs to perform renovations to open a new profitable area of their business.
For example, if you operate a local bar and want to renovate an area, you can introduce legalized gaming machines. Once installed, these gaming machines will immediately create new revenue streams.
If traditional funding is not an option, a merchant cash advance can supply the funds so you can buy the materials to perform the renovation.
Once finished, the increased revenue can help you pay back the MCA.
MCA Repayment Strategies
When planning business finances, small business owners should consider the daily repayments to maximize return on an MCA.
MCAs and business sustainability go hand in hand. If the MCA repayments drain your finances, you may have difficulty maintaining operations.
Carefully examine the repayment schedules and forecast how you will operate after the deductions from your daily credit card sales.
You can adjust the repayment period, the total working capital you request, or the daily deduction percentage to adjust the MCA to fit your situation best.
MCA companies will use your monthly revenues to determine your loan limit, but the repayments are made daily once you receive the funds.
In some cases, traditional bank loans may be more appropriate if you can’t find the right balance of daily deductions and loan repayment time for an MCA.
Tips For Strategically Using A Merchant Cash Advance
We’ve reviewed a few examples of how to use a cash advance strategically, but that’s only a small portion of what you can do.
Every business is unique, and new and exciting opportunities can present themselves, which require specific amounts of free cash to take advantage of them.
The key to using a merchant cash advance effectively is to carefully perform a cost-benefit analysis to ensure a positive end result.
Using a merchant cash advance should leave you more profitable as you pay it off. At the very least, it should leave you in a stronger business position if that was the goal instead of immediate profitability.
You don’t want to use a merchant cash advance to simply “plug a leak” into your business finances.
For example, if your operating costs are simply too high and you are starting to run into cash flow problems, a merchant cash advance will likely only slow your business decline.
Before investing in new initiatives, You must first work on cutting costs to stop the bleeding.
The only exception is if the funds from a merchant cash advance will help you cut costs, for example, through equipment purchases that help you leverage automation to reduce labor costs.
In those cases, the MCA can help you lower your costs. But once again, this type of analysis will require careful study to ensure your higher costs are due to a lack of certain technology and not the result of poor bookkeeping or business planning.
Overall, an MCA leverages sales for growth financing. The key is to ensure that the MCA funds will translate into increased sales and revenue for your business.
Frequently Asked Questions About Merchant Cash Advances (MCA) in Business Growth
Businesses can use merchant cash advances strategically for growth, including hiring more talent, equity funding, taking advantage of an unexpected opportunity, purchasing more or specific inventory, renovations, and repayment.
Keep in mind that if merchant cash advances are not used strategically, they can put businesses in a worse financial situation than where they started due to their high repayment cost. Ensure you know that you need these funds to capitalize on growth opportunities and that the repayment won’t hurt your cash flow.
Businesses can apply for a merchant cash advance (MCA) with specific financers, such as their payment processor. ECS Payments is known for its easy-to-apply merchant cash advance program coupled with its top-of-the-line payment processing solutions. Contact us for more information.
