Need Access to Fast Capital? Consider a Merchant Cash Advance. The financing option continues to be a game changer for small businesses impacted by the pandemic.
By Kobi Ben Meir Edited by Amanda Breen
Opinions expressed by Entrepreneur contributors are their own.
Businesses across the country are emerging from beneath the weight of the lingering Covid-19 pandemic with new and constantly changing needs — and startlingly few financing options rising up to meet them. Traditional bank lending, lines of credit and other resources are falling short, and it's entrepreneurs who are missing out.
The events of 2020 indiscriminately forced businesses of all sizes to be even more agile and adaptive. New outdoor structures, safety equipment to meet regulations, beefing up ecommerce — all mean business owners now have days, not months, to adapt. Shifting guidelines, worker shortages and structural changes all require snappy decision-making and funds fast. The problem is, for most businesses, access to swift, easy capital simply isn't there.
Related: Free On-Demand Webinar: How to Improve Your Business's Cash Flow
Small businesses are strapped for cash
While small businesses make up 99.9% of all U.S. businesses and employ 47.1% of the country's workforce, their finances can be incredibly fragile — fluctuating sales and high expenses make it hard to save — and the Covid-19 pandemic truly showed us how vulnerable the nation's small businesses are. The majority of businesses with monthly expenses of $10,000 only had enough cash on hand to survive for two weeks when the pandemic hit and shutdowns began. And that number refers to their standard monthly expenses, not those needed for additional infrastructure, staff or new products.
What does a business owner do when she needs $50,000 to pay her team and build an outside dining structure for her 18-month-old restaurant? She only has a few weeks before money runs out and little time to devote to the process. Loans and lines of credit from the big banks are hard to come by and come with a mountain of paperwork. They often require 24 months of profit — a tough ask at the beginning of any business's life — even if it is heading for success. Lines of credit could be an option —as long as your credit is good enough to avoid interest rates of up to 80%.
A lot of business owners turned to options offered by the government, which did provide a stopgap for many. However, some programs, like the PPP and RRF, have recently ended. And data shows that businesses in communities of color were the last to access these types of loans due to their higher likelihood of being unbanked or underbanked. Making things worse, these loans are hardly easy for a layperson to understand, and their applications can be labyrinthian — lessening the odds for approval.
Restaurants are a perfect example of the trap businesses are caught in. Many hospitality employees switched careers during the pandemic, and establishments are now critically understaffed. To entice workers and combat turnover, they are offering higher wages, better benefits and sign-on bonuses — all at a cost to the bottom line. But they can't utilize their full capacity to make profits without a full staff. They need a capital infusion with a high chance of approval to spur hiring, increase capacity and maximize profits in the end.
Related: A Post-Pandemic Survival Guide for Restaurants
Merchant cash advances are a nimble, accessible solution
Owners never had time to waste, and now they have less than ever. Businesses need an easy, quick way to get capital that doesn't require months and months of steady profit so they can pounce on new opportunities that will increase growth in the long run. Merchant cash advances (MCAs) are a funding solution that can fit these needs — only a few months of profits are necessary, some have one quick online application, and you can receive money as soon as the same or next day.
How does a merchant cash advance work?
A merchant cash advance gives business owners between $10,000-$250,000 to fuel hiring, purchasing, building, repairs — anything they need to grow. With an MCA, a business owner has complete control over how they use their funds.
Essentially, a merchant-cash-advance lender purchases a portion of a business's future sales and advances the money. The advance is then repaid at a factor rate of around 1.2-1.5 — there's no compounding interest like with loans and lines of credit.
Related: Attention Small Businesses: There's a Generation-Sized Untapped Customer Base
Merchant cash advances are great options for giving businesses a much-needed boost as they continue to deal with the Covid-19 pandemic. The application process is quick and easy, and funds are available almost immediately — meaning urgent issues can be addressed and opportunities jumped on. The funds can also be used to make payroll or hire new staff, increase marketing efforts, build infrastructure and generally help a business grow and thrive.
