If you are a business owner needing some short-term financing for your company, you might consider taking a look at the “merchant cash advance,” or MCA, which has become extremely popular because of the relative ease of gaining approval. Many loans go out without a consideration of the guarantor’s FICO score.
Merchant Cash Advances – How a Working Capital Loan Can Work for Your Business
Working capital loan meaning
Working capital is your current assets less your outstanding liabilities, or your current assets divided by your outstanding liabilities.
How can a business secure a loan without a look at the guarantor’s credit? The security on the loan comes from a measurement of cash flow, which comes from a verification of positive cash flow through the company’s recent revenues, or future credit card receipts. Once a lender takes a look at those factors, the lender determines the size and advanced limits for this sort of credit.
Primary Advantages of a Merchant Cash Advance
You’re not putting any collateral or credit at stake. An MCA is another way to find cash right now to help your business. If you take out a traditional business loan, it can end up influencing your business credit rating. However, a merchant cash advance goes as a sales transaction and, which means that it does not show up on credit reports most of the time. If you take an MCA out for your business, you don’t have to put up any collateral, which means that default is not nearly as risky as it is with traditional loans.
The applications and collections process are easy. Applying for an MCA is generally a quick, straightforward process. While a traditional lender will want to look at tax returns, credit scores, business plans and financials, MCA provides just look at cash flow, the time a business has been open, or monthly receipts from credit card payments.
The cash is available quickly. Less paperwork means faster deposits. A traditional business loan can go through an underwriting process that takes weeks or even months, but MCA loans generally take about a week to fund after you send in the application. If you have a creditor breathing down your neck or you have an opportunity come across your desk that requires swift action, this quick response time can be a real lifesaver.
Collections are based on your revenue. Paying back your MCA lender is easy because you don’t have to make payments until you bring in revenue. Your MCA loan does require a fixed payment each month, but MCA collections generally fluctuate with sales volume. So when you bring in more money, the lender will take more than the minimum, but if you have a down month, you’re not behind the eight-ball with a missed payment. This keeps you from facing late fees just because you had a month that didn’t quite meet expectations.
Approval rates are much higher. MCA applications are evaluated on the performance of your business rather than on financial statements and credit reports. This means that as long as your business is relatively stable, you should be able to qualify for a loan. Your available advance amount will depend on your positive cash flow or your cash credit receipts each month.
What does this mean for you? The MCA gives you another way to gain access to funds when you need them for your business. The commercial lending market is very conservative market right now, so consider the MCA as another way to gain financial flexibility.
One of the top reasons why businesses come to us for working capital loans or other types of financing (including the merchant advance) is to augment the working capital they have on hand. Working capital is an essential metric in gauging the stability and financial performance of a company and also shows the degree to which the company has operational efficiency. Let’s take a look at how to calculate working capital and why it is important for your business.
Working capital ratio
When you divide it, it comes out as a ratio. If your working capital ratio is lower than 1.0, that means that your liabilities are greater than your current assets, and so your company could have difficulty paying outstanding debts at least in the short term. If the ratio is 1.0 or more, that means that you have the assets on hand to settle all of your current debts.
This seems like an easy ratio to calculate, right? However, even this simple number can indicate some of the operational factors at work in your company – factors that are a lot more sophisticated than the basic information needed to compute this ratio.
- Business Growth – As businesses expand in size, their working capital needs change if you factor it as a percentage of their sales. When turnover goes up by a particular amount, extra working capital may be necessary to pay for the growth without eating into your cash flow. You definitely don’t want to have cash flow dry up during the middle of expansion – things can go south in a hurry when that happens.
- Seasonal Patterns – If you own a pizzeria on the boardwalk in a beach town, you’re not going to get the same revenue in December that you got in June. If you own just about any sort of retail store, you need to build up your inventory a bit after the end of August so that you won’t run out of things during that lengthy holiday shopping season. Even if your business is fairly regular from one month to the next (as in the case of a gas station), there will be times when you bring in more sales than others, and sometimes you will need more working capital to pay the buildup in receivables.
- Processing Payments – If you have built up a consistent monthly sales volume, and your customers pay with cash or checks, or with credit cards when they make the purchase, you won’t need as much working capital as you would if you are providing products and services in an industry with net 60 day credit terms for your customers but 30 day terms from your suppliers. If you’re always having to pay for things before you get paid, you will need more capital on hand to float.
- Cash Flow and Inventory Management – Inventory is one of the biggest uses of working capital that most companies face. If you have inventory sitting in your warehouse (or your garage) or on your shelf, that’s working capital that is doing nothing for you. That’s why if you have a working capital ratio of more than 2.0, and inventory is the big player in that, the ratio can work against you when it gets high. Tracking how quickly inventory becomes cash for you is a major metric in showing your operational efficiency.
If your small business needs some working capital to assist with one of these elements of operations, you are far from alone. We can help our clients find the funding they need to boost the operational efficiency of their company. We have easy forms for you to fill out online that will help you figure out how much you could expect in a merchant advance, as well as the repayment policies that we have designed. There are other merchant advance companies who might approve larger advances, but we try to strike a balance between what you need now and what you can reasonably pay back without jeopardizing future cash flow. Give us a call or an email, and one of our merchant advance professionals will be in touch to talk about how we can help you.
Amansad Financial stands ready to help you and your business. Talk to one of our MCA experts today about how we can give your business a quick infusion of cash without affecting your credit.