Merchant Cash Advance
Closing the Small Business Financial Gap
What is a Merchant Cash Advance?
A merchant cash advance is a type of business funding that small to medium-sized businesses use to fund a wide variety of business needs. Some of the most common uses are growing sales, equipment financing, and working capital. This type of easy-access financing is intended for short-term purposes and fills a void for companies unable to secure traditional financing from banks.
How does an MCA work?
An MCA is essentially a sales agreement in which capital is exchanged for a proportion of future sales. They are not technically classified as loans; rather, an exchange of money now for a future promise. If the future sales projections of a business look promising, but upfront capital is needed to secure those projected sales, MCA financing provides instant cash flow to fund inventory for the large sale.
Investing in a Merchant Cash Advance
Great wealth is created through great opportunity. Merchant Cash Advances are that opportunity. MCA funding companies are in need of additional capital because the demand for advances massively outweighs the supply of capital.
The reason demand outweighs supply is because the lending industry has changed greatly over the last 30 years, particularly since 2008. As a result of regulatory changes and changing risk profiles, it’s harder than ever for businesses to gain access to the funds they need to survive. According to most resources, on average, 70% of businesses under 5 million in revenue per year are being rejected on their loan applications. COVID-19 has further shrunk available capital for many industries. For reasons like the ones stated here, shows like Shark Tank and The Profit are raging successes.
Risk Assessment
“Pros & Cons”
Massive Returns
Purchasers can receive very lucrative payments that can not be found anywhere on public markets, even on the highest-yielding public investments. Monthly payments on accounts receivables purchased are as high as 10%.
Cash Flow Quickly
Typically purchasers will receive payments from their purchased accounts receivables within 1 -4 weeks of the purchase.
Short-Term Cycles
The average advance only lasts between 3-12 months which means purchasing capital is returned quickly after making a profit. This allows purchasers to make large profits in a short period of time.
Diversify Risk
In an over-inflated stock market, the volatility of the public markets can be devastating for the portfolio. Diversifying away from all publicly traded assets helps fortify the portfolio against any negative public opinions that affect the market. ie: Covid-19
Unsecured Financing
The singularly biggest drawback of purchasing accounts receivables is they are not secured by any assets. When businesses receive MCAs, they do not have to offer any collateral. So for purchasers, if the merchant cash advance is not remitted, there is no insurance to protect the purchaser’s capital. Even with stringent underwriting, this is no small risk to be taken lightly and must be heavily considered.
Growing Opportunity
For multiple reasons, small businesses are denied traditional loans from banks or the Small Business Association, and even if they are approved, sometimes business owners don’t want to wait 3-9 months.
It’s been estimated that in early 2019, pre-coronavirus shutdown, SMEs have about $80 billion-$120 billion worth of unmet funding needs, in large part because of lengthy loan approval times. Read More ->
This has lead to business flooding to the non-traditional financing market.
If a business isn’t able to easily secure a financial partnership (ie: Shark Tank) and doesn’t want to use multiple high compounding interest credit cards, the next option is a merchant cash advance.
A merchant cash advance is a financial tool that allows a funding company to provide a business with money as an advance against future sales of the business.
Money goes into the business and the funding company is repaid from a portion of every sale.
MCAs can help businesses expand, solve a short-term financial issue, purchase an asset, purchase inventory, launch a marketing campaign, or assist with other business-related ventures.
Get in touch for additional information.
If you want to learn more about MCA’s and how they can help increase returns and diversify the portfolio, please fill out the adjacent form.
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“Successful investing is about managing risk, not avoiding it.”
— BENJAMIN GRAHAM
“FATHER OF VALUE INVESTING”