Small business owners in need of a short-term business loan or quick and easy financing frequently turn to a loan vehicle called a merchant cash advance, without fully understanding how a merchant cash advance can affect their cash flow.
Effect on Cash Flow
Merchant cash advance payback schemes have the potential to put significant pressure on the daily cash flow of a business. The daily payback of a merchant cash advance can range from low (around 10% of business receipts) to significant (up to 50% of business receipts). When the payback requirement on daily receipts of $5,000 is at a favorable 10%, the actual daily payback amount is a manageable $500. When the daily payback is on the more typical high end – such as 50% -- then a full $2,500 of the business’s daily receipts of $5,000 goes to the cash advance provider. Calculated over the course of a week, if the total receipts of the business are $25,000, only $12,500 remains to run the business after the cash advance payments are made. Although cash advances are generally short term - typically 3 months to a year - the business must be able to survive on severely reduced cash flows while paying back the cash advance.
Effect of Refinancing
The real risk of a merchant cash advance to the business owner comes from refinancing their merchant cash advances. With favorable loan terms and a low daily payback percentage, business owners should find that the repayment schedule is manageable. However, if the terms are unfavorable and the daily payback percentage is high, the paybacks may be unmanageable. When this happens, business owners often find themselves facing the choice of defaulting on the cash advance or refinancing the cash advance and rolling the old balance into the new balance. This cycle of refinancing cash advances over and over again quickly spirals downward and often drowns a business in debt.
Preserving Cash Flow
Business owners who need short term financing can educate themselves to avoid the risks of merchant cash advances while taking advantage of their benefits. Daily cash flow requirements -- the amount of money that the business requires to operate - must be realistically analyzed and understood. The amount remaining after repayment of the cash advance must be enough to cover daily payroll, materials, rent, and other fixed business expenses. Any business taking out a loan, whether from a bank or a cash advance provider, must be able to operate and pay back their loans at the same time.
Merchant cash advances have the potential to significantly impact a business’s daily cash flows. Companies that are struggling with their existing merchant cash advances have options with regards to debt relief. Reputable debt relief resources, like Creditors Relief, can analyze a business’s situation and work out a tailored, affordable solution that can help resolve a myriad of debt-related issues.