Merchant Cash Advances are becoming an ever-popular form of alternative finance. It allows businesses to raise finance based on their credit card turnover and they’re often a better route to take for many than trying to obtain a business loan.
Typically, you’ll be given the equivalent of your average monthly turnover and you repay this amount, plus a small fee, through your card receipts until the finance is paid off. It’s a hugely attractive prospect for many but researching this form of finance is vital as it’s not suitable for every business.
Here’s a few tips to remember when taking out and using a Merchant Cash Advance.
1. Make sure it’s right for you
As mentioned, a Merchant Cash Advance (MCA) is not the best solution for every business. The perfect candidate would be a small to medium-sized business that receives the majority of their business through credit card sales, such as services businesses such as restaurants, cafes and shops.
You need to have incoming credit card sales in order to qualify for an MCA, as it is essentially a purchase of your business’s future sales. Perhaps you’ve attempted to gain funding from the bank, only to be flatly rejected.
2. Read the small print
The industry of MCA’s and alternative finance is still largely unregulated, so there’s no limits on interest rates and repayment options. If you don’t want to get stuck in a worse financial situation than you were previously, read all the small print and terms on your MCA to ensure that it’s going to work for you and your business. If it doesn’t feel quite right then shop around. There’s a lot of providers out there and they’re all different.
3. Pin down your goals
How do you plan on spending the money you are given through an MCA? Pin this down in the early stages so that you don’t end up spending the money on anything else and not getting around to reaching specific goals. Whether you’re expanding your business, working on a specific project, purchasing new equipment or hiring additional employees – decide how much it’s going to cost you.
Ultimately, the MCA provider will decide how much money you qualify for but there’s no harm in them being in the know with how much you are interested in receiving.
4. Decide your repayment period
A repayment period will depend on the business. It could be a month, or it could be six months. If you’re taking out an MCA to cover a one-off expense such as new equipment, then pick a shorter window and get it paid off as soon as you can. If you’re using the money to cover something longer-term such as a renovation, then choose the longer repayment period.
5. Avoid delinquencies & negative balances
Delinquencies and negative balances will likely send a provider running. After all, they’re lending you the money on the basis that they will get this money back. If you have a history of falling behind on payments or having substantial insufficient funds then they will probably decline your funding.
You don’t want to be seen as not being able to meeting daily financial obligations. Make sure you are on time and up to date with all your bills and payments to creditors.
6. Collect your paperwork
Although you won’t need half as much paperwork as you would when applying for a bank loan, you will need to provide your credit card revenues when taking out an MCA. This will determine how much a provider is willing to loan to you. You’ll need a few months worth of bank statements and receipts, as well as running costs and any other outgoings.
For many businesses, taking out an MCA is the perfect option when you need a bit of extra cash in a short space of time. An MCA could be exactly what you need to keep your cash flow in order and meet your next business goals. If it is the right alternative finance option for you, then keep the above tips in mind and you will be sure to get the best out of this product!