CAN Capital explains that merchant cash advances are “cash-flow friendly”:
“You don’t have to worry about fixed monthly payments during tough times, and there is no set maturity date.”
As such, merchant cash advances can be enticing for businesses that need this flexibility.
In the words of Deborah Sweeney, who is Chief executive of entrepreneur help site MyCorporation.com:
“The cash advance traditionally fluctuates directly with the merchant’s sales volumes… This gives a business owner flexibility with which to manage their cash flow, particularly during a slow season. When business is slow, the money withdrawn decreases, and increases during busier times.”
Additionally, David Goldin, President of the Small Business Finance Association, which represents MCA providers, notes that there are no personal liabilities attached to such funding.
“If you take a merchant cash advance and you owe $80,000 and your business goes out of business, you owe the merchant cash advance provider nothing.”
MCAs Can Get Out Of Control
However, the MCAs also hold heavy disadvantages that experts believe offset many of the advantages they possess. If payments aren’t planned correctly, MCAs can quickly throw you into a cycle of debt.
Craig Everett, a professor of finance at the Graziadio School of Business management suggested MCAs to only be used as a “one-time thing to get through a rough patch. If it becomes an addiction, then it will eventually destroy the value of the business.”
“Expensive money,” is how John Moore, a professor of finance, economics and accounting at Walsh College in Michigan describes merchant cash advances.
“The entrepreneur should exhaust all its cheaper sources of financing first,” Moore suggests.
When considering an MCA, Moore suggests looking for professional help from a financial adviser, and modelling “a cash-flow forecast that demonstrates the business’s ability to repay.” If the forecast “cannot prove that the loan can be safely repaid within a reasonable time frame… the business should not take out the loan.”
MCA’s Can Shrink Your Business’s Bottom Line
Caitlin McShane, a Marketing and Communications Director at the nonprofit lender Opportunity Fund further emphasizes this point, advising borrowers to take care, as an MCA can steadily diminish a small business’s cash flow, and ultimately, bottom line. Unfortunately, there are some borrowers that commit to an MCA without understanding how they work.
“You can’t figure out where the money’s going,” Caitlin explains. “They pay themselves back before you see a dime from your own sales. Your revenue might even be up, but your profits are down.”
Business owners that find themselves in this debt cycle while find that they are unable to make payroll or purchase additional inventory. McShane explains that this is because even though they “used to have healthy cash flow to support” such needs, the current profits are now being used to cover the expensive cost of debt.
“You find yourself borrowing more money to try to cover the first loan that you can’t afford to repay and keep the lights on at your business,” she says.
