Girl at Lemonade Stand

Non Traditional Funding Options For Capital

  • March 15th, 2016
  • Tyler Heaps

Historically, the most stable route to funding for a small business has been to rally investors through charm and business savvy. Behind that, the next step is usually to pursue a business loan from a bank.

The modern entrepreneur, however, has many more options at their disposal. Each one comes from a different source and with their own particular brand of risks and rewards. Let’s take a look at an up-and-coming method of funding procurement: the merchant cash advance.

What Is a Merchant Cash Advance?

At a distance, merchant cash advances look very similar to loans. A company provides a sum of funding up front and then recoups that expense over time, plus a little extra. In reality, however, merchant cash advances are the process by which a company purchases future transactions. Instead of delivering stand-alone payments, the company takes its “product” (your earnings) straight out of your card transactions. This is essentially a way to obtain fast funding without needing to go through the avenue of financial institutions.

Risks

The risk that MCAs carry is that they tend to be more expensive than loans. This means that a young business with a tenuous grasp on their consumer base could end up unable to support day-to-day business on ~85% of a day’s earnings.

It also means that you don’t have direct control over how much money your company pays. You cannot, for example, say that you will give $200 a day until the amount is fulfilled. Instead, you must make do while having somewhere around 15% of your daily earnings sent to your partner- regardless of how much impact that has on your ability to grow.

Benefits

This can also be a benefit, however. If you have a slow day, you aren’t expected to deliver a sum of money that you don’t have- you will only ever need to give up a percentage of that day’s earnings. This also makes it impossible to get behind on payments, as you can with a bank loan.

Perhaps the best benefit that MCAs offer is that they don’t require a hugely complicated application process. Their approval standards don’t usually take credit history into account, just revenue and bank account balances. Particularly because this application process is often completed within 72 hours, MCAs are an attractive option for some small businesses.

Proper Use of MCAs

Using an MCA wisely usually means that you need to focus on expansion with the funds that you’re granted. This is because you will only be able to fulfill the agreement if you’re increasing an already-existing stream of revenue. Most MCAs are used as an influx to fund new hires, branch expansion, or other ambitious projects. In short, this is not a good method for ameliorative business moves, fixing previous problems.

Due to their nature of selling a portion of future transactions, the wisest way to spend their funding is to make large strides of growth without sacrificing the number of sales. For example, financing a remodel that shuts down the business might not be the best choice. Instead, many businesses will choose to boost employee training or to put extra shine on a previously successful marketing campaign.

Among non-traditional funding options, MCAs don’t tend to foster marketing the same way crowd-sourcing does and doesn’t have the prestige of attaining a small business grant, but it’s certainly worthwhile in its speed and ease of access. Stable businesses looking to expand are good candidates, but MCAs are not optimal for start-ups that aren’t established in their daily earnings. Assess your company’s steadiness before agreeing to sell its future balances – it can disrupt a young company’s natural growth, but it can be a huge stimulus to growth.

About the Author

  • Tyler Heaps

Tyler is a member of the Lendio marketing team. He is passionate about digital marketing, small business, and helping small business owners succeed. Tyler is an outdoorsman and loves spending time with his family.

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