Lenders offer many financing products for the same reason stores sell many kinds of shoes: there isn’t a one-size-fits-all solution. You wouldn’t want to buy high heels to walk along the beach or flip-flops for a funeral. Even generally good options like gym shoes or comfortable sandals can’t meet the exact needs of footwear for specific activities like snowshoes or diving flippers.
A merchant cash advance (MCA) is a specialized product in the financing world. It offers flexible approval and fast funding (as fast as the same day). However, just because you need capital quickly, doesn’t mean an MCA is the best choice. Recognizing the smart uses of merchant cash advance financing starts with understanding what makes the product unique.
What Makes a Merchant Cash Advance Unique?
Three key traits set an MCA apart from other working capital financing: repayment, factor rate, and term length.
Repayment
Payments on a cash advance are a percentage of your credit and debit card sales on a monthly, weekly, or daily basis. This payment method is very different from a traditional set repayment amount based on the loan amount and interest rate. The benefit is that while the percentage you owe, usually between 10 and 20%, never changes, the payment changes as your cash flow increases or decreases. Generally you can set up these payments as fixed withdrawals so they happen automatically.
Factor Rate
MCAs typically use factor rates instead of interest rates to determine the total repayment amount of the loan. Multiply the loan amount by the factor rate, usually between 1.2 and 1.3, to determine how much the loan will cost. The benefit of a factor rate is that you know exactly how much you owe when you secure an MCA. It never changes. Say you borrow $3,000 with a 1.27 factor rate through merchant cash advance financing. Your total repayment amount is $3,810.
Term Length
Your payments may vary based on your business’s cash flow, but the full loan still needs to be repaid within the set term (usually 18 months). You can choose to pay off the merchant cash advance early, but it won’t reduce your total cost since MCAs use fixed factor rates instead of interest. However, early repayment can lower your overall debt and improve your financial flexibility.
Now that you know the basics, let’s explore five smart uses for a merchant cash advance that capitalize on its quick funding and unique repayment methods.
1. Stocking Up On Inventory
An MCA is ideal for stocking inventory since the return on investment is reasonably predictable and quick. Selling your product generates more revenue, making it easy to repay the borrowed capital quickly and without straining your cash flow.
Consider using a merchant cash advance to top off your inventory before demand increases, especially if you operate a seasonal business. Say your surf rental shop in Florida sees the highest demand in June. You could use a retail shop merchant cash advance in April to stock up on boards and gear before the rush. The increased business covers the repayments, which also decrease with your revenue as things slow down, protecting your cash flow.
Or, use an MCA to access bulk discounts from vendors and use the savings to repay the advance. Say your café can save 40% on orders of organic coffee beans over $3,000. Knowing your customers love the product and the price savings will more than cover the factor rate, you use a cash advance to take advantage of the discount.
2. Capitalizing on Marketing Opportunities
Marketing opportunities can come and go faster than you can secure funding through a traditional loan. When you need capital for a campaign to quickly boost your sales, an MCA provides fast, same-day financing.
Let’s say a local bridal expo has vendor slots for your beauty salon, but you need to reserve your spot immediately. You use merchant cash advance financing to cover the event fees and an ad campaign to increase your visibility. You attract more bookings from the expo, quickly boosting your revenue and covering repayment.
3. Launching a New Product
Expanding your product offerings requires upfront spending to study demand, develop the product, order the inventory, and market the new offering. Use an MCA to fund pilot programs while relying on current revenue to cover the repayments.
For example, you’d like to offer a mobile tire change service at your auto body repair shop. You need $27,000 to expand your space, store the new equipment, stock up on tires, and promote the service. You use a merchant cash advance to fund your auto repair shop’s latest offerings. The daily repayments naturally match your sales cycles, and launching the tire change services drives your revenue up.
4. Handling Immediate Repairs
When the point of sale (POS) crashes or the oven malfunctions, your business’s operations can grind to a halt. Addressing the repairs immediately ensures your business stays open now and in the long run. Consider merchant cash advance financing to handle urgent needs quickly.
If your food truck’s fryer fails right before a holiday weekend, you could use a restaurant cash advance to purchase an immediate replacement. You don’t miss out on potential business because the new fryer lets you continue to serve customers. Repayment flows out of your card sales without a second thought.
5. Covering Payroll
You need your team to continue running and growing your business, but covering payroll during slow seasons or hiring new employees to ramp up for future growth can strain your finances. A merchant cash advance can bridge the gap and cover initial hiring expenses until your income catches up to expenses. Using the short-term cash boost to invest in your team is a smart way to improve your operations and sales.
Let’s say your dog grooming spa regularly sees an increase in business before the holidays, and you have more customers than you can currently accommodate. You use an MCA to hire and train a second groomer and increase your bookings. The additional business repays the advance and covers the increased payroll costs.
Is an MCA the Right Fit?
An MCA is a smart option when you need fast funding with a flexible repayment structure.
So the question isn’t whether a merchant cash advance is a good financial tool, but whether it fits your business. After all, when the financing fits, it’s a smart move to use it to move forward confidently and successfully.
