In my last article I defined what a Merchant Cash Advance (MCA) is, and made some comparisons between an advance and a loan. The primary difference being that with a MCA you are selling part of an asset – a percentage of your future credit card receivables, vs. creating a debt – a loan with fixed terms, a maturity date, and personal liability.
This article will point out when it’s NOT a good idea to get an advance to raise cash, followed by how to know when your circumstances say it IS a good time to get one.
When NOT To Get a Cash Advance:
When you know it’s not going to fix the problem. If you know your business is on it’s “last legs” and is probably going to fail no matter what you do, a cash advance isn’t what you want. If anything, it’ll only make matters worse. Selling a percentage of future receivables reduces future cash flow (even though it’s only by a small percentage of daily sales), something you don’t want to do when you’re just hanging on
When you haven’t thought it through. As with any business decision, it’s important to look at all your options and make your best choice. So make sure you know the reason(s) a MCA is better for your circumstances than more traditional ways of raising cash, e.g., a bank loan, equity financing, etc.
When you don’t have a clearly defined purpose. A MCA should never be used as if it were some sort of savings account. If you haven’t done your due diligence and you don’t have a specific goal for the money (along with an expected ROI) – don’t apply for it. Lying idle in a checking account the costs of lost receivables would far outweigh any benefits that are simply “hoped for”.
Extravagance. Although this shouldn’t even need to be said I just had to throw it in. You definitely won’t come out ahead using the money to “splurge” and go on a shopping spree. No more than you would if you were using a credit card. It always catches up with you in the end.
When a Merchant Cash Advance Makes Sense:
When presented with an unexpected opportunity which requires immediate action. Say one of your suppliers has a “liquidation sale” and you know from experience you can make a decent profit at the price you can now buy goods to use as inventory. As with any liquidation sale if you don’t act fast, you lose. Because a MCA can provide a lump sum of cash quickly it makes sense to fund your purchase this way. More sense then losing out on the opportunity, because you’re buying something you use anyway, and you know you should make a decent profit.
When faced with a temporary threat, problem, or circumstance. What happens when you don’t have money for taxes that have to be paid, and you’re close to having a lien put on your business? Or you’re a victim of a natural disaster such as flooding, a fire, or a hurricane? What do you do if you get a notice a construction project is planned which will block convenient access to your place of business? Or your business gets sued and you need money for a defense? All these are temporary circumstances, which placed an immediate need for more cash to continue operations.
When you want to expand your business, implement a well thought out marketing plan, hire a key employee, remodel, etc. As long as their is a specific use for the money, and it will add to the bottom line of your business, a cash advance can be a good source of funding that’s relatively quick and easy to obtain.
When you want an alternative. When for whatever reason you don’t want to use your credit to get a bank loan, you don’t want to sell a part of your business, and you don’t want to have an asset sale causing you to give up rights or property you don’t want to lose.