Buying a new company vehicle, installing up-to-date IT hardware and software, procuring factory equipment and refurbishment are just some of the many reasons why small businesses sometimes need simple cash flow solutions to move forward. The community bank used to be the place to go to secure the necessary funds, but the post-recession lending restrictions have all but barred the way for SMEs, especially smaller, less-established concerns.
Fortunately, there are other avenues for healthy but cash-strapped businesses to explore to find those simple cash flow solutions that can smooth the path to greater profitability. This article touches briefly on some of the instruments available before looking more closely at one in particular: the merchant cash advance (or MCA funding).
Six Alternative Lending Options
Here are some simple cash flow solutions that may be worth investigating for some SMEs:
- Invoice Factoring. This is where a business sells its invoices at a discount to a third party. This is an option when a company has many debtors as it both offers improved cash flow and takes work away from the accounts department.
- Restructuring Finance. Restructuring a company’s finances is a drastic measure that can free up cash flow in a struggling business.
- Unsecured Loans. Taking out an unsecured loan from a reputable alternative lender can give business owners access to much-needed cash without the risk of losing assets. However, such loans usually carry a high interest rate and can involve restrictive repayment schedules.
- Bonds. Larger SMEs may be in a position to issue bonds in return for a cash injection. This is a long-term borrowing strategy not often suited to the needs of small businesses, and is not very popular as private bonds cannot be traded.
- Equity Investment. Equity investment (the issuing of shares) is another option for larger SMEs where investors are likely to lend money in return for dividends and a share of the company.
- Merchant Cash Advance (MCA Funding). This is where a company lends money and agrees a set fee for the loan. The loan repayments are usually, but not always, taken directly from the company’s sales.
Exploring the Merchant Cash Advance
Of the simple cash flow solutions listed above, the merchant cash advance, also termed MCA funding, is the one which is usually most accessible and attractive to smaller SMEs. In many ways, the merchant cash advance works just like a short-term unsecured loan, but there are some important differences:
First, MCA funding doesn’t involve interest payments. Instead, a set fee is agreed upon and this is repaid along with the initial advance. Second, the repayments are not usually fixed but are calculated as a percentage of each credit or debit card sale. In this way, repayments rise and fall in tune with business performance. If business is going through a downturn, there is no risk to the business’s assets and the advance just takes that little bit longer to pay off.
Finally, merchant advances are more accessible than many other forms of lending. For example, Speed Fund LLC, a company specialising in MCA funding, only requires that merchants are turning over at least $6,000 per month and use a credit/debit card machine to take payments.