MCAs, Right For You?

Merchant cash advances (MCAs) can be crucial for up and coming business owners or established businesses that need a little boost.? An MCA is like a loan, but not actually classified as one. An MCA is borrowed funds from your future card sales, facilitated by your credit card processor that is automatically repaid from debit or credit card transactions, rather than paid back through your bank account.

This raises the question, is an MCA right for your business? That depends on a number of different things.?

Are You In A Slow Season?

One factor could relate to your industry’s “slow season.” Slow seasons vary from industry to industry. For example, businesses that depend on the weather will do well in specific seasons. If you run a ski resort, you’re likely going to get traffic in the winter. Conversely, if you run a surf shop, you’ll probably be busier during the warm summer months.?

Another example would be businesses that are oriented towards specific holidays, such as Christmas tree sales. Other cyclical industries include those that sell educational supplies, which are busy during the school year but dead in the summer. It also includes sports related businesses, which will lose sales during the off season.

Other markets also have off seasons. Wedding photographers are busiest in the summer, and lose business during the winter months. Construction companies aren’t able to work as frequently in snowy or wet climates. Hardware stores, similarly, are going to have the most business during the summer months.

Even professional services have peak seasons, such as accountants and CPAs during tax season. Regardless of industry, many businesses are not evergreen, raising the question, what do I do in the off season?

The Small Business Struggle in Off Season

While large businesses can usually afford to eat some costs during their off seasons, small business owners don’t always have that luxury. Fewer customers mean less cash flow, and many small businesses can’t afford to keep the doors open without that steady income. Overhead costs like inventory, rent, insurance, and payroll can start to take a toll.

According to Chase Bank, the average small business generally has about $12,100 in cash. For some, that can cover a month of expenses, while for others, it can last just days. However, small businesses in some industries can manage with limited cash flow. Sole proprietorships and personal service providers who work out of a home office can often go for months without additional cash flow. Many others can’t manage this.?

A business’s cash reserve acts as a safety net between shutdown and survival. The issue is that most small businesses aren’t earning enough to keep cash reserves high enough for the full off season. The average small business’ daily cash inflow is $381 dollars, with an outflow of $374. While that includes the owner's salary, a net profit margin of $7 will take a small business nearly five years to earn cash reserves of $12,000.

Compensating With Coupons?

So what can you do? Well in many cases, small businesses attempt to increase sales during off seasons through a variety of means. Many companies will send coupons to addresses, emails, and phone numbers of existing customers to bring in some sales. Others use seasonal promotions to bring in more traffic.

While this often works well enough, it has its limitations. Customers often need to see something 7-14 times to take action on it, and will need to be reached out to several times before taking action. Additionally, these things take time, which many businesses don’t have when they’re burning through cash reserves.

Small Business Loans?

Others will apply for a business loan, but these take time to get approved, often between 30 and 90 days, making them a poor choice of financing option for short-term expenses. For many small businesses, this is more time than they have, and they’ll burn through those reserves before approval occurs. These are better for long term periods of growth, not a quick source of Cash.

Benefits of a Merchant Cash Advance?

Enter the merchant cash advance. With an MCA, a business owner is given cash in exchange for a percentage of their future sales. There are two distinct ways this can occur.?

The first, and most common, occurs when a provider takes a percentage of card sales every day or week until the advance is paid. The second sees the provider withdraw a fixed amount from your business account every day or week. The amount is usually based on your revenue.?

The varying types of repayment allow for repayment flexibility, with MCAs generally having about a 3 to 18 month repayment period, making them a short-term solution to a short-term problem. Additionally, MCAs are different from traditional loans because they do not have interest rates. Rather, they have something called factor rates, which are presented as a decimal instead of a percentage.?

These generally range between 1.1 and 1.5. If your MCA is $20,000 and your factor rate is 1.3, you will be required to pay $26,000 before the MCA is closed. Unlike traditional loans, MCAs have factor rates instead of interest rates. Factor rates are presented as a decimal instead of a percentage and typically range between 1.1 and 1.5. As an example, if your MCA is $20,000 and your factor rate is 1.3, the total repayment amount is going to be $26,000.

These rates are fixed, making them different from business credit cards, another possible option for financing off seasons. However, business credit cards have an annual percentage rate (APR), which applies to the balance as you’re paying it off, and compounds over time, making interest increasingly difficult to pay off. Factor rates only apply to the initial loan amount.

While business credit cards can sometimes cost less overall than an MCA, this only occurs when they are paid off promptly, which many small businesses do not have the cash on hand to do. This is because on average, business credit cards have an APR of 22%.?

The longer you take to pay off a credit card, the more overall you are paying, while the length of time you take to pay an MCA is irrelevant, because the overall loan amount will remain the same, making them excellent choices for businesses that struggle with cash flow during off seasons.

They’re also quick and easy to apply for, generally taking far less time than a business loan, thereby making them a great source for quick funding. Financial management is important when considering the use of an MCA, as in some instances, one will pay less with a business credit card. However, an MCA is ideal for a merchant who needs funding as soon as possible and will be able to use their future cash flow to repay that funding.

If you think that MCAs might be good for your business, ECS Payments can help. Your industry, length of time in business and cash needs all play a part in determining how best we can help you.??