How Can a Merchant Cash Advance Work for My Business? There are plenty of articles, stories, and voices of merchants expressing the costliness of merchant cash advances. Then again, there are plenty of people that complain 8% APR is too high. People too often look at a loan in terms of fitting the monthly payment into their budget or worrying about the APR. If you borrow $100 today and are asked to repay $105 in a week from now, the APR on this loan would be 260%. If you borrow $100 today and are asked to pay $105 two weeks from now, the APR would be only 130%. The APR difference is huge, yet misleading. |
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So you borrowed $100 today and purchased $100 worth of inventory. You sold all of that inventory in 5 days for $190. You pay back the loan of $105 and profited $85. How much will it really matter if you pay it back in 2 days or next week? Take this and apply it to the merchant cash advance. A merchant cash advance is a great way to leverage your business without putting up any personal collateral. Use these 2 examples: You have an opportunity to acquire a larger share of the market if only you had the cash flow. Your gross margins are 50% (Cost of goods / Revenue). You sell $13,800 of your future receivables for $10,000
today. You now have $10,000 and
you spend it on inventory. You have more of your product to sell and you
capture more of the market. Since your margins are 50%, you turn the $10,000 in
inventory into $20,000 of revenue. The result is $10,000 in gross profit – the
cost of the advance of $3,800 = $6,200. These are sales you would not have been
able to take advantage of normally. By leveraging with your merchant cash
advance, you created $6,200 in profit that you normally wouldn’t have. Once the
Advance Provider has received their $13,800, you can repeat this process again.
Your restaurant is only filling up to 75% capacity and you don’t have the money to advertise. You know that if you could only get more people to dine there, they would surely become repeat customers. Your cost of food is 30% of your revenue. You sell $13,800 of your future revenues today and receive $10,000. You spend all $10,000 on advertising and more diners come to your restaurant. After your ad campaign ends, you have not only brought in more revenue to your restaurant for now, but you will have added some of those diners to your loyal consumer base. As the diners return again and again, having discovered your restaurant as a result of advertising, the merchant cash advance will have paid for itself and will continue to bring you profit for a long time. If you can handle sitting at a bank for 6 months waiting to get approved for a loan with a ‘decent APR’ , fine. For those that can’t wait or can’t get a bank loan at all shouldn’t look at the merchant cash advance in a negative light just because they’ve been so ingrained with APR’s. Use the money constructively and the net result will make sense to you. |
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