How retail businesses can benefit from a Merchant Cash Advance

If you’re in retail and make the bulk of your money through EFTPOS sales, a merchant cash advance (MCA) could be your best friend.

With it, you can free up cash flow, giving your business room to breathe. The extra cash can go towards any daily expenses or even help your business grow. Let’s dive in and find out whether you could use one to your advantage.

What is a merchant cash advance?

A merchant cash advance is a type of business finance, unique in that repayments come from your future credit card sales rather than directly from your pocket. For this reason, they are best suited to retail businesses that make lots of sales via EFTPOS.

With a merchant cash advance, you can leverage future sales in order to free up working capital and give you some extra breathing room.

How does a merchant cash advance work?

Your chosen lender will give you an upfront lump sum payment known as an advance, and you’ll pay the money back with an agreed-upon percentage of your future sales.

Lenders benefit from this arrangement through a ‘factor fee,’ an additional payment you’ll make on top of the initial advance, similar to interest.

So, when your customer makes a purchase via your EFTPOS machine, a percentage of that payment will be given to your lender. You’ll continue to make repayments this way until your advance is paid off in full.

When you apply for an MCA, your lender will determine the percentage you’ll pay of each transaction. They’ll make this decision based on the health of your business and previous sales history. The higher your monthly turnover, the better. And the more sales you make, the faster you’ll pay off your MCA.

The benefits of a merchant cash advance

Collateral isn’t usually required

The great thing about a merchant cash advance is the quick and simple application process compared with other types of finance. Most of the time, you won’t be required to put any assets on the line—lenders are more concerned with your cash flow and number of sales.

Your credit score isn’t make-or-break

With a merchant cash advance, less emphasis is placed on your credit score as lenders are more concerned with the stability of your cash flow. That’s not to say your credit score will have no impact, but there tends to be more leniency and looser criteria for approval.

Quicker approval process

Because of the more lenient approval criteria and lower documentation requirements, the application process for MCAs is much faster than for standard business loans.

Repayment amount adjusts to your business revenue

Merchant cash advances are handy in that they adjust to your business’s revenue at any given time, which can help eliminate cash flow issues. lf your business is busy pumping out sales, you’ll pay your loan off sooner, and if you face a dry spell, you won’t have to worry.

The drawbacks of a merchant cash advance

Could be more expensive than traditional loans

A merchant cash advance is usually more expensive long-term when compared to other types of business finance. For some, it’s a small price to pay for the ease of application and fast turnaround.

Limited borrowing amounts

The maximum borrowing amount varies between lenders, but generally, business owners are eligible to borrow 100% of their average monthly card turnover.

There's an element of uncertainty

While previous transaction history and turnover are good indicators of your company’s ability to remain stable, any business owner will know how quickly things can change. While unlikely, if you do default on your MCA or become unable to meet your repayments on time, you’ll have to dig for money elsewhere.

In saying this, any form of finance (and running a business, period) comes with an element of risk. That’s standard; just make sure you’re informed so you can decide whether the risk is worth the reward.

In some cases, a third-party credit provider could be the safer option

If you have a PayPal loan, for instance, you’re tying your credit to a means of obtaining revenue. If you have a dispute with your credit provider, they could restrict your account, harming your ability to get revenue.

On the other hand, a third-party credit provider could be the safer option, as you won’t be impacted in the short term if you run into any issues.

Who's eligible for a merchant cash advance?

Eligibility criteria varies between lenders, but generally, they’ll look at the health and stability of your business to determine whether lending to you is feasible.

But the good news is, you don’t need any assets upfront, and your credit history will hold less weight as a deciding factor. Lenders are more concerned with your cash flow.

This makes an MCA great for businesses that have few assets but make lots of sales—typically, those in retail.

How quickly can I get a merchant cash advance?

Merchant cash advances can be approved in as little as 2 hours. Paperwork is kept to a minimum as well, making an MCA an attractive option for business owners who want fast access to cash.

While secured loans generally come with lower interest rates, they can take months to approve—not ideal for businesses that need funding quickly to solve unexpected problems.

Is a merchant cash advance right for me?

Merchant cash advances are not for all businesses. If you have multiple revenue streams, a merchant cash advance might not suit, but those who receive most of their turnover through EFTPOS terminals could benefit.

In addition to this, not all lenders will work with all card terminal suppliers, so it’s best to clarify with your chosen lender whether they accept the technology you currently use.

Alternatively, a lending expert at Valiant can find a lender who matches your needs and take care of the application process on your behalf.