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Challenges in Managing Merchant Cash Advance Payments Solutions for Small Businesses

Running a small business can be tough, ya know? Cash flow issues pop up all the time and it’s not always easy to get a business loan from a bank. That’s why lots of businesses turn to merchant cash advances (MCAs) when they need quick funding. But MCAs come with their own set of challenges.

The Basics of Merchant Cash Advances

For anyone not familiar, a merchant cash advance is kinda like a business cash advance. Instead of getting a set amount of money upfront and paying it back with interest like a typical loan, the way an MCA works is:

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  • A company called an MCA provider gives you an upfront lump sum of cash
  • In exchange, they take a percentage of your future credit card and debit card sales until the MCA is paid back
  • There’s no set repayment schedule – the amount taken each day/week varies based on your sales

So if your sales are up one month, you repay more. If they dip, you repay less. Makes sense so far yeah?

The Challenges of Managing MCA Payments

While MCAs can be super helpful for getting quick funding when you need it, they come with a few key challenges, especially around managing the payments:

1. Daily/Weekly Payments Can Disrupt Cash Flow

Because MCA providers take a piece of your daily or weekly credit card sales, the payments are ongoing with no real end date. For small businesses already dealing with cash flow issues, these constant payments can make it tough to cover other expenses like payroll, inventory, etc.It’s kinda like getting nickeled and dimed, you feel me? Sure the individual payments may be small, but they add up fast and can catch you by surprise if you’re not careful with your accounting.

2. Hard to Plan for Fluctuating Revenue Months

One of the tricky parts about MCA paybacks being tied to credit card revenue is that they fluctuate up and down with sales. So when you have a slow season or a few bad months with lower revenue, you may suddenly struggle to keep up with the fixed costs like rent, employees, etc.And when you do rebound and have some killer busy months? Well now your MCA payment spikes up too. So it makes things unpredictable and hard to plan for.

3. Easy to End Up Overleveraged

Here’s the reality – lots of small biz owners take out multiple MCAs over time to keep funding growth. But before you know it, 10, 20, even 30% or more of your daily credit card revenue is going towards paying these things back.Add in super high double or triple digit interest rates and now you’re looking at being seriously overleveraged. And good luck ever getting out from under all those payments.

Tips & Solutions for Managing MCA Payments

So MCAs definitely come with some financial management challenges. But if you go in with eyes wide open, there are a few key tips that can help:

♦️ Closely Monitor Cash Flow

Like I said earlier, those daily/weekly payments can really take a bite out of your available cash before you even realize it. So step one is to stay on top of your cash flow and know exactly how much is going out to MCA providers each month.

♦️ Have a Plan for Slower Months

Instead of getting caught off guard when your credit card revenue takes a dip in the summer or whatever, plan ahead. Figure out the baseline you need to cover costs like payroll and rent. And determine if you should hold off on that MCA until sales bounce back.

♦️ Explore Alternative Funding

Rather than stacking multiple MCAs at crazy interest rates, look at some alternatives like:

♦️ Negotiate Payment Terms

Believe it or not, you actually have more room than you think to negotiate MCA payment amounts before signing on the dotted line. So don’t be afraid to push back on rates that could overwhelm your revenue.

♦️ Build an Emergency Fund

Having a financial buffer can be clutch for managing through lean months or unexpected dips in sales. So try to steadily set aside a few thousand in a separate emergency account.Even if you can’t sock away a ton each month, every bit helps cushion the blow when you hit an MCA cash crunch. Dealing with merchant cash advances can be kind of a headache sometimes. But going in with the right expectations and financial management practices can make a huge difference. With some discipline around tracking cash flow and planning for fluctuations, you can take control of MCA payments instead of letting them control you.And don’t be afraid to reach out for help getting a handle on things either. There are small business financial advisors out there who can help you develop solid money management plans tailored to your biz.

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Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

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