The Changing Face of Merchant Cash Advances

Updated: August 28, 2009

Issue Summary


Once considered just one of many capital sources available to businesses today, merchant cash advances, also known as business cash advances, are fast-becoming a critical lifeline for companies large and small. No wonder: as the global credit crisis continues, more and more financial institutions are tightening their credit requirements, refusing businesses loans and constricting loan terms. Even office-supplies giant OfficeMax announced in July that it is no longer accepting its own credit cards after the financial institution that oversaw its program terminated the arrangement. The decision impacted about 100,000 small businesses.

As times get tougher for companies that rely on business credit cards, many are turning to merchant cash advances for immediate access to working capital. Taking full advantage of this lending tool requires an in-depth understanding of its perks and pitfalls.

Analysis


Making the most of a merchant cash advance entails understanding how it works and how you can benefit from it. A merchant cash advance allows a company to receive cash in exchange for a portion or percentage of future credit and debit card sales. Once approved, a cash advance is typically deposited into a company's business account for immediate access to funds. An automated process ensures that a merchant cash advance provider retrieves a fixed percentage from each sale as it occurs for the lifespan of the funding.

There are countless uses for a merchant cash advance, ranging from emergency situations to long-term growth strategies. Some of these applications include:

  • Expanding your business with new locations
  • Purchasing new equipment
  • Training employees
  • Funding marketing campaigns
  • Subsidizing an acquisition
  • Investing in product innovation and development
  • Participating in trade shows


While leases, lines of credit, and investors grant companies access to much-needed funds, there are benefits unique to merchant cash advances. These include:

Immediate access. Request a loan from your local financial institution and you'll find yourself burdened with a heap of paperwork. Loan proposals and lengthy applications can take weeks to fill out, process and approve. Not exactly an ideal situation for a company in desperate need of immediate funds. A merchant cash advance, on the other hand, often entails a speedy application process that, upon approval, can place money in-hand within hours. What's more, a merchant cash advance renewal is a very quick process.

Positive cash flow. Many loans include a rigid monthly payment schedule that must be adhered to regardless of a company's monthly revenues. Fortunately, a merchant cash advance rarely includes fixed payments and a fixed timeframe. Rather, the repayment process is based on the future credit and debit card sales, ensuring a more positive cash flow.

Flexibility. While many loans stipulate how your funds can be used, a merchant cash advance offers companies the freedom to apply monies for whatever needed purpose. For example, you may wish to allot a portion of the funds to training staff on a new product or service and put the remaining money toward participating in a trade show.

Implications

For all its perks, a merchant cash advance also carries risks for today's loan-seeking businesses. For starters, because merchant cash advances may involve sharing future revenue, ownership and profits, they can be expensive and impact future growth. What's more, the increasing popularity of merchant cash advances has produced a number of fraudulent outfits that collect upfront fees and then run away with your money - never to be heard from again. Here are a handful of ways to mitigate these risks:

Assess your needs. Companies must determine the best use of these funds before enlisting the help of a merchant cash advance provider. For example, while merchant cash advances are ideal for managing fast growth and covering unanticipated expenses, they are not intended to serve as a rainy day fund or for personal purposes such as vacations and fancy sports cars.

Calculate ROI.
Because companies need to be able to justify the expense of a merchant cash advance, it's necessary to calculate one's potential ROI - how long it will take to pay off the debt, what impact the merchant cash advance will have on future sales growth, and how it will shape business cash flow.

Do your homework. Shop around for a merchant cash advance provider that best meets your business needs and make sure you find out how long a vendor has been in business. Requesting customer references is also a key component in the due diligence process.

By wisely leveraging the funds accrued through a merchant cash advance, and establishing favorable terms with a reputable provider, companies can access the money needed to survive and flourish in today's credit crunch.

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