What is an asset based loan? An asset-based business line…
Merchant Cash Advance – Types of Repayment Options
Merchant cash advances have becoming a popular form of financing for businesses to get quick cash to pay unexpected expenses. It’s also a great way to get quick cash for unexpected investment opportunities too.
Although it’s always good to have a cash reserve for investments, sometimes there is going to be a great opportunity that you won’t want to pass up for lack of cash.
Many people get merchant cash advances confused with taking out a loan. Technically, it is not a loan. That’s important to understand from a legal perspective.
Here is how these work. A merchant cash advance provider like Delancey Street will give a business a lump sum cash amount in return for a larger amount in the future paid with future sales.
Here’s a quick and easy example. Say there’s a pressure washing company. They get a large commercial contract to wash an entire campus of a technology company. The entire contract is worth $100,000.
But in order to get this order, they have to wait 60 days to get paid. It’s called net 60 in business lingo. It’s a great opportunity, but with some short term downsides in terms of cash flow.
Basically, the problem is that the pressure washing company still has expenses they have to pay. For example, in order to do the work for the tech company, they have to employ 5 workers on the crew to do the work.
Those 5 workers are not going to be willing to wait 60 days to get paid for their work. They are going to want to get paid every 2 weeks just like most everyone else working in the industry. In total, let’s say the labor cost for this contact is $30,000.
In addition to labor, the pressure washing company will need enough supplies and fuel to fulfill the order. Again, he can’t wait until he gets paid to buy the supplies and fuel. In fact, he won’t get paid at all if he doesn’t do the work first. Let’s say supplies and fuel cost another $20,000.
Now his expenses to do the work for this contract has ballooned to $50,000. The good news is, it’s a $100,000 contract and he’s going to make $50,000 on this deal.
Again, the problem is he doesn’t have $50,000 cash on hand to pay those up front expenses for labor and supplies. One alternative is to not take the contract. That would be unfortunate.
He could also opt to take out a business loan, but that would take too long and he wouldn’t be able to do the work in a timely fashion.