What is an asset based loan? An asset-based business line…
Restaurant Merchant Accounts and Credit Card Processing
Restaurant Merchant Cash Advance
Merchant cash advances (MCA) is a form of financing for businesses, particularly small businesses and retailers. It’s not a business loan. It’s technically a cash advance, as the phrase states.
It’s one of the new financing innovations available to businesses that needs short term cash to pay expenses or invest in growth.
Basically, a merchant cash advance company will pay a business a lump sum in exchange for future sales to be paid as a percentage of credit card and debit card transactions.
Merchant Cash Advance – Flower Shop Example
For example, let’s say a local flower shop needs $20,000 to buy a shipment of flowers for the upcoming Valentines Day rush. They don’t have the cash on hand and they have maxed out their credit cards.
They also don’t have time to apply for a bank loan which can take several days to weeks. It also requires a ton of paperwork, getting financial statements together, digging up tax returns, etc. Banks require a lot of documentation and information in the business loan application process.
They need the $20,000 and they need it quick. Otherwise, they won’t be able to buy the flowers from their supplier and they’ll miss out on one of the biggest sales days of the entire year.
Just for fun, let’s say they expect to make $100,000 in retail sales from the $20,000 in wholesale flowers they buy. Without the $20,000, they won’t make the $100,000.
So they go to a merchant cash advance company and get a lump sum payment of $20,000 to buy the wholesale flowers. In exchange, the flower shop will pay them back $25,000 with future sales. The MCA company makes $5,000 eventually and the flower shop can now buy the whole flowers it needs to sell $100,000 worth on Valentines Day.
How the cash advance payback works is the interesting part here. The MCA company will take a percentage of the credit card and/or debit card transactions as they come in. They may take 10-20% of each sale.
That means the next customer that uses a credit card to buy a $100 bouquet of roses for his girlfriend, $20 will automatically go back to the MCA company. That process will be repeated until the entire $25,000 is paid back.
So on Valentines Day, the local flower shop will sell $100,000 worth of flowers. They use the cash from the MCA company to buy $20,000 worth of wholesale flowers, but now they have to pay the MCA company back $25,000.
That means they made a margin of $75,000 on that deal. Without the cash advance and without any other source of financing, that local flower shop would’ve had to pass on this opportunity to profit from Valentines Day.
Benefits for Businesses and the MCA Companies
Depending how you look at it, this can be a win-win situation on both sides. One of the those win-win’s comes from the fact that the payments are automatic.
This is obviously good for the MCA company because it lowers their risk of being paid back. If it’s a retail business they’re servicing and they automatically get a cut of the credit card transactions, that means the MCA doesn’t have to wait for the business owners to make a conscious decision to write a check to pay the advance back.
It’s good for the business owner as well. The small business person doesn’t want to have outstanding debts just like anyone. But when it comes time to write that check to pay back the cash advance, there may be temptations to use that cash for other things and delay payment.
In the long run, this can be detrimental to the business, particularly to their FICO score or credit ratings. It can also be emotionally draining for the business owner to be forced to make that decision to write that check and watch cash drain from their account.
If it’s setup as automatic payments and the MCA company is being paid back incrementally in small payments, that makes it tremendously easier for the owner to make sure the payments get made. And it doesn’t hurt as much emotionally because the payment goes to the MCA company before it even ends up in their bank account.
This is called the split withholding method. Most MCA companies and businesses alike prefer this method.
As the business environment improves and many more people enter the exciting world of entrepreneurship and starting their own small businesses, the marketplace will need to keep up with new innovations to finance these new ventures. The economy depends on it.
Merchant cash advance is one of those innovations that small businesses can utilize to keep them in business and take advantage of growth and investment opportunities that may come up.