How can a merchant cash advance help fund holiday inventory and staffing?

For retail and seasonal small businesses, the holidays are often the busiest time of year. In the weeks before, these businesses may see a surge in demand. This influx of customers may also bring an increase in business expenses such as staffing and inventory.

Between the costs of seasonal inventory, additional workers and swelling overhead, the holidays will stretch your capital like a rubber band. When businesses encounter a financial crunch, many turn to merchant cash advances. Distinct from a loan, an MCA allows your business to repay the advance as you make sales instead of with a set monthly amount. For businesses that anticipate their sales to increase, a merchant cash advance may be a viable option to cover costs.

Small seasonal businesses tend to have cyclical sales. A merchant cash advance acts as a form of funding that fills the gaps when your business lacks cash on hand. This provides some flexibility to you as a merchant.

If your business does many credit card transactions, and you expect sales to rise, a merchant cash advance may make sense. You’re required to repay a percent of your daily card sales and not a set monthly payment. As the business makes daily sales, the funder recoups its investment.

For many, stocking the shelves will be a priority. The influx of customers and business can spell disaster for an unprepared business. Preparing for the rush with stock requires capital. In a time crunch, a merchant cash advance could help cover the costs of holiday stock. If demand keeps up, having good stock will help maximize sales.

Often an influx of customers can coincide with an increase in expenses like payroll. The added inventory and more customers means small businesses will need more people. These holiday hires could help you maximize revenue by handling the surge of customers. A merchant cash advance could allow your business to bring on additional workers to handle the influx of holiday traffic.

For some, this time of year is the perfect time to relocate. This large expense can cost small businesses a lot. If you’re hoping to start the new year in a new place, you could consider using a merchant cash advance. Consider the situation where you decide to open a second location for your business. You’ll need to cover costs that include rent, moving expenses and new stock.

An Advance on Future Sales

The difference between a loan and a merchant cash advance starts with the funding side.

Whereas a loan involves a lump sum that is repaid in monthly payments, a merchant cash advance involves an upfront advance on future sales. On a loan, the interest rate can be either fixed or variable over a short or long term. Payments may be predictable and fit into a business budget.

With an MCA, the basic idea is to allow the business to receive the capital necessary in an upfront manner, and the funder recoups their investment when a sale is made. The advance can be from $5,000 all the way up to $500,000. To find the right merchant cash advance, consider working with an independent sales organization (ISO). An ISO acts as a middle-man or a go-between to bring together businesses that require funding and institutions that provide it. Once you’ve chosen the right one, the money will be deposited into your bank account once approved.

Because its payment schedule likely fluctuates based on how well you’re doing on a daily sales basis, an MCA is flexible. However, as an alternative funding method to a loan, it can be on the more expensive side. MCA costs are determined by a factor rate. Typically, the factor rate will vary between 1.1 and 1.5.

One risk is stacking. Stacking is when businesses go from one funding source to the next, amassing multiple funding that is above what they can afford. The result is a stack of funding on top of each other, with various payments and costs tacked on, and they can multiply quickly. Because you’re on the hook to pay each individually and collectively, they can cause significant harm to a company’s bottom line. To avoid stacking, be sure to fully understand the cost of a merchant cash advance before you sign.