Could Merchant Cash Advances Solve Small Business Cash Flow Issues?

Jason Hunt
November 17, 2023

One of the most significant challenges facing small businesses worldwide is maintaining a healthy cash flow. As per a QuickBooks survey, 61% of small businesses regularly struggle with cash flow issues.

These challenges can stifle growth, prevent businesses from fulfilling orders, and, in severe cases, lead to bankruptcy. One potential solution that is gaining traction is Merchant Cash Advances (MCAs).

Could Merchant Cash Advances be the key to solving small business cash flow issues?

Understanding Merchant Cash Advances and Cash Flow

First, it’s important to understand exactly what we mean when we talk about Merchant Cash Advances and Cash Flow.

A Merchant Cash Advance is a type of funding in which a business sells a portion of its future sales in exchange for an upfront lump sum of money. It is not a loan, but rather a cash advance against future income.

Repayment is based on a percentage of the business’s daily credit card receipts, allowing for flexibility in the repayment schedule.

Cash flow, on the other hand, refers to the net amount of cash or cash equivalents moving in and out of a business.

Cash flow can be either positive (when a business has more cash coming in than going out) or negative (when the business has more cash going out than coming in).

Reasons Why Businesses May Face Cash Flow Issues

Close up hands counting money,  Merchant Cash Advances and Cash Flow
  • Delayed Payments: Businesses may wait for invoices to be settled, especially with long payment terms, which can slow down liquidity.
  • High Operational Costs: Rising operational expenses that outpace revenue can lead to cash flow problems.
  • Seasonal Sales Fluctuations: Off-peak seasons might see income that’s insufficient to cover costs and restrict cash flow.
  • Inventory Management: Overstocking ties up funds, while understocking results in missed sales, leading to a severe cash flow crisis.
  • Unexpected Expenses: Sudden costs like equipment repairs or legal issues can disrupt budgets, adding to the cash flow issues.
  • Inadequate Pricing: Underpricing, even with high sales, might not generate enough revenue, especially for small businesses gaining traction.
  • Rapid Expansion: Quick growth can result in increased expenses before new revenue streams mature fully, leading to a cash flow crisis.
  • Poor Financial Planning: Without proper budgeting, predicting and managing cash flows becomes a challenging ordeal for small businesses.
  • Declining Market Demand: External factors, like economic shifts and recessions, can reduce product demand and overall cash flow.
  • Debt Repayments: Large portions of revenue diverted towards loan repayments can strain available cash.

The Role of MCAs in Resolving Cash Flow Issues

Businessman drawing cash flow graph vector illustration

It might seem counterintuitive that MCA repayments reduce cash flow, but MCA can play a crucial role in solving cash flow problems faced by small businesses. Here’s why:

Immediate Access to Funds

In a typical business loan scenario, the approval and disbursement process can take weeks or even months. An MCA provides immediate cash which can be crucial for businesses facing an imminent cash flow crisis. In many cases, funds can be available within 24 hours of approval.

Flexible Repayment

MCAs offer repayment terms tied directly to the business’s daily credit card sales. This means during slow business periods, repayments are smaller, and during times of robust sales, repayments are larger.

This flexibility can be a lifesaver for businesses with highly seasonal cash flows.

No Collateral Required

Unlike traditional bank loans that often require collateral, MCAs do not. This means that businesses can obtain the funds they need without putting their assets at risk.

Considerations When Opting for MCA

Despite the benefits, there are considerations to keep in mind when contemplating an MCA as a cash flow solution:

Higher Cost

MCAs often come with higher costs compared to traditional bank loans. The annual percentage rates can range anywhere from 20% to 250%, making them one of the more expensive financing options.

Impact on Profit Margins

Since repayment is made daily based on credit card receipts, this can impact profit margins, especially if your margins are already slim.

Limited by Card Sales

MCAs are only an option for businesses that do a significant amount of sales through credit card transactions. If your business operates mostly on cash or check sales, an MCA might not be feasible.

Making The Right Decision For Your Business

Young businessman working from his office and counting cash money

Merchant Cash Advances can indeed be an effective solution for small business cash flow issues. However, the decision to use an MCA should be made after a thorough examination of your business’s financial situation.

If your business has a steady flow of credit card transactions, can manage the daily repayments, and needs quick access to cash, an MCA can be an excellent option.

On the other hand, businesses with slim margins or infrequent card sales should be cautious and explore other funding options.

Conclusion

In conclusion, Merchant Cash Advances offer a promising solution to cash flow issues for small businesses. Their speed, flexibility, and lack of collateral requirements make them a desirable option for many entrepreneurs.

However, the decision to pursue an MCA should be based on a careful analysis of the company’s needs, financial health, and ability to absorb the costs.

With careful consideration, an MCA can be a powerful tool to ensure a healthy and steady cash flow for your business.

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Jason Hunt

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