Most business loans aren’t designed to provide you with working capital, especially not traditional amortizing, fixed-rate loans based on the equity in an asset. That’s an area where financing based on your business assets and other alternative solutions provide some of today’s most useful financial products, including the merchant cash advance against electronic transaction income. That probably sounds like a mouthful, but it just means an advance against the income you get from credit cards, ACH direct debit, and other electronic payment methods. Getting working capital with this kind of cash advance is fast, and most importantly, it’s designed to work with your business cycle.
Payment Varies With Your Income
When you take out an MCA, you aren’t taking out a loan with regular payments. Instead, you need to understand the idea of holdback and interest. Interest is typically higher on paper with a merchant advance, but since it’s a short-term tool, it can wind up being less expensive than a multi-year term loan under the right conditions. The reason interest is higher is to compensate for the payment structure, which is based on the lender claiming a percentage of the proceeds that come in through your merchant account until the debt is paid. For example, if your merchant cash advance has a 10% holdback, the lender takes 10% of its income regardless of how much or how little that happens to be.
As a result, when you use it to load up on stock or revamp for a surge in demand, it’s easy to pay it down with just a month or two of booming business. Until that boom, the payment might not keep up with interest, but it also won’t keep you from meeting your other overhead obligations.
Finance When You Need It
There are a lot of businesses that operate on cyclic demand, especially in retail. When they have cash flow issues, it’s not because of a lack of awareness of this cycle, it’s because of unforeseen events that absorb cash reserves. Using an MCA for cash flow capital when you’re in a downturn provides a path to managing those surprises without depleting your cash reserves. Alternately, it also provides capital for a big inventory buy-in right before seasonal demand spikes, even if your reserves are low. You can finance another whenever you’ve paid down your last merchant cash advance, without needing to maintain a business credit line or update your asset values the way you would with an ongoing credit line.