From the blog How to Get Out of a Merchant Cash Advance
If you’re the owner of a small business, you may have taken out a merchant cash advance (MCA). While there are many upsides to a merchant cash advance (see below), some business owners are keen to get out of their MCA for a variety of individual reasons.
If you are trying to get out of a merchant cash advance, or if you are thinking about doing so, here are some tips for you, along with five ways to get out of an MCA.
Benefits of a merchant cash advance
If you are considering an exit strategy for your MCA, make sure you think hard about all the angles. You want to make sure you’re not just experiencing cold feet as there are multiple benefits to an MCA.
Merchant cash advances are notable for how quickly retailers receive their funding—usually in about a week. This aspect of MCAs is appealing to many merchants who often need their money on an abbreviated timeline for purchases vital to their business.
No spending restrictions
Unlike many small business loans, microloans, or venture capital, with merchant cash advances there are no restrictions on how you can spend your money. Whether you need a new delivery vehicle or money for inventory, you decide how the advance is spent.
No set payments
As you probably already know, merchant cash advances require no set monthly payment, unlike conventional loans. Instead, you pay with a portion of your business’s credit card sales. If you have a slow month, there’s no need for concern because you don’t have a huge payment looming.
Flexible credit requirements
One of the top reasons business owners take a merchant cash advance is because the credit requirements are much less stringent than with other types of funding. Because you are given the advance in return for a share of your future sales, you can worry less about your credit score, which is a boon to startups and new retail establishments.
No risk to assets
The ability to trade your future sales for a cash advance makes MCAs safer for most business owners. There’s no need to put up your assets as collateral, so you can’t lose your business or other assets that might not be protected.
Ways to get out of a merchant cash advance
If you decide your MCA isn’t really what you want or need, there are ways to get out of one.
Pay off the advance
While this strategy might seem impossible at first, you may have resources you haven’t thought of before:
- A family member or friend who can loan you money interest-free
- Personal savings
- Venture capital or similar new business funding
- Selling assets you’re not using
- Renting out part of your business space
- Taking out a conventional loan
While taking out a loan is probably what you wanted to avoid in the first place, this might be a viable option if:
- Interest rates change
- Your credit rating improves
- Your projected cash flow favors the conventional loan model
Remember, though, this will leave you with a monthly payment that could become a burden—unlike MCA payments, which are based on your sales. Consider too that a conventional loan may require you to put up collateral, which you avoided with an MCA.
And don’t expect to get approved and funded as fast as with an MCA, either.
Increase your business profits
Perhaps the simplest way to get out of your merchant cash advance is to pay it off the normal way—through sales—but faster than you originally anticipated. How?
By increasing your profits.
There are essentially two ways to increase profits. Increase your accounts receivable and/or decrease your accounts payable. You need to change the ratio of what your business is spending to what it’s making so you keep more of the money at the end of the day.
There are numerous ways to accomplish this, such as:
- Raise prices on your goods or services
- Add a new product or service line
- Implement premium pricing for customers who want extras, custom merchandise and rush orders
- Change your payment policy to take more upfront
- Run the metrics on returns, refunds and chargebacks to see where you can minimize lost sales
- Take advantage of low-cost or free advertising to get more customers in the door
- Re-launch your business with a new branding strategy
- Develop new business leads
- Offer commission to employees who bring in large accounts or sales over a certain volume threshold
- Initiate a customer loyalty program, membership club, BOGO deal or similar incentive to boost sales
- Change sourcing on materials to less expensive alternatives
- Reduce staffing where possible
- Offer to trade extra time off instead of bonuses or wages to overtime workers
- Explore deferred payments on accounts payable
- Lower overhead by moving, reducing utilities consumption, and decreasing the use of supplies
- Cut fat from your operating budget, like trade shows that are more social than sales oriented
Switch payment processors
Not all payment processors are created equal. If your merchant cash advance is linked to your payment processor, as is common, you may be stuck with a less than optimal situation.
Consider switching payment processors to one more invested in your business and moving your MCA with you. You may wind up with a much better system all around.
Maybe it’s not your MCA that’s the problem. Maybe it’s the company you’re working with.
If you have a number of business loans in addition to your merchant cash advance, you could consolidate all your loans into one, rolling your MCA into it.
Like consolidating personal credit card loans and paying them off in return for one loan payment, business loan consolidation can settle the outstanding debt on your MCA.
Factoring companies buy business accounts receivable for a lump sum. They then take on the job of getting those accounts to pay up.
This method of raising cash works well for businesses whose clients are slow paying (typically in service industries, where customers are billed post-service) and for those who may be understaffed in accounting.
If you are struggling to track down payments and losing money because of it, factoring may help you recoup what might otherwise be lost profits.
Tips you can use right now
While you’re thinking about whether getting out of your merchant cash advance is truly a wise move, here are some tips you can put to use today:
- Familiarize yourself with loan options and interest rates for your credit score, should you decide that’s the right route for you.
- Go over your business’s budget and look for missed opportunities to increase profits.
- Resist the temptation to “stack” loans. Multiple loans can make repayment next to impossible, and it’s hard to keep track of all the terms and due dates.
KEEP READING: 9 Ways to Avoid Chargebacks and Credit Disputes