How Merchant Cash Advances Improve a Businesses Cash Flow and How to Use Them
- 8th August 2018
- Posted by: Loanable
- Category: Resources
If you have a business or company, it can be selling products or be service based, one of the most important financial aspects of yours and any business is cash flow!
If you do not have the money coming in, in a timely manner, you can struggle to pay wages, buy supplies and pay suppliers, and purchase stock.
The operative words here are cash coming in, “in a timely manner”.
You may have the sales to support your business, but are those sales generating the money you need as you need it? If not, you have a cash flow issue.
And many companies do experience this at some point.
They’ve got the sales, but then wait for the money to come in, especially if you are a business that accepts credit and debit cards. It can take time for the money to get back to you.
And if your business is seasonal, it can be even worse. For a few months a year you earn years revenues. However, this doesn’t mean you still don’t have sales, and bills to pay.
How can you balance things out?
With a merchant cash advance. These are a business loan that allow you to repay them as you can afford to, and provide you the cash you need now, not later.
First, let’s get an understanding of what a merchant cash advance is, and how they work.
What is a Merchant Cash Advance
Merchant cash advances are also called business cash advances, and while they are a loan, think of them as a loan against future sales, an advance of money to a business that will pay the advance or loan back over time, and out of future credit and debit cards sales.
And since the use of plastic, credit and debit cards has now for the first time taken the lead in how we here in the UK pay for purchases, it’s a pretty good guess that there are plenty of companies that could benefit from this form of a business loan.
In essence these loans work is that business is given a loan and they pay back the loan as a percentage of their credit and/or debit card transactions.
There is no term or length of the loan, the loan end when it is paid back.
There is no APR or interest rates, there is an agreed upon fee or percentage of the card transactions to be paid back.
Sounds like a pretty good deal, because for many cash strapped business it is a good deal.
Some benefits are:
* You do not need a business model to apply for the advance
* The advance is based on your current credit and debit card sales
* No interest rate or APR
* No fixed monthly payments
An example may be a business needs £5,000, and has a merchant gateway and accepts card payments.
An amount is agreed upon to be advanced and repaid, based on the current sales and cards taken. This may be 5%, 10%, ans only paid back out of the total sales using cards.
So if a business has a banner month in sales and card transactions, the 10% payment is higher that month. If the next month sales are slow, they still pay 10%, but it is 10% of a lesser amount.
This flexibility works and allows a merchant to pay the advance back on their own terms. They may the advance back quicker, or it may take longer, it depends on card sales.
The Pub of Great Ales is looking to expand and begin serving breakfast and lunch in addition to their usual evening meals, however, in order to grow and expand, they need money for additional kitchen equipment, and also tables chairs, glasses, and other dining essentials.
The Pub of Great Ales accepts credit cards and a high percentage of their sales are paid by cards.
They request a merchant advance based on their current card sales to be paid back at a rate determined by the lender, a percentage each month of their card transactions.
Initially the pub is not paying much back as they are still in the process of expanding and sales have stayed the same.
However, once the new restaurant part opens, sales take off, and with a few months they have repaid the advance.
The Curio Shop sells souvenirs, post cards, sweets, and general sundries in a small coastal village. Their business is seasonal.
For three (3) to four (4) months out of the year they are very busy, but then sales drop off until the next season. The shops are struggling to balance its cash flow due to the peaks and valleys of sales.
Using a merchant advance loan they can pay the loan back through their cards sales, and pay it back much quicker during their peak months, and much slower during their off-season months.
A great way to balance cash flow, and pay a loan back in an affordable manner.
With more and more businesses accepting credit and debit cards, and with us as consumers using cards more and more for purchases, this is a win-win finance situation for most businesses.