A merchant cash advance is a lump sum that a lender provides to a business in exchange for the future sales of that business.
MCA, an alternative form of financing, is great for businesses that do not qualify for traditional lending and that need capital quickly.
Businesses may need some extra cash during an economic downturn, for expansion purposes, to keep the business afloat, or to work out a short-term financing issue.
Another primary use for MCAs is to combat revenue dips from seasonality.
Businesses That Benefit From MCAs
Especially when a business is just starting out, the normal ebb and flow of business cycles can cause substantial fluctuation in cash flow. These companies may not have enough capital or resources to leverage to withstand unsteady times. These are the cases in which a merchant cash advance is a lifeline to these businesses.
Business owners must meticulously manage cash flow, reduce overhead, and mitigate excessive costs in economic low points. Even with these strategies in place, small businesses may still need capital due to their size and youth.
Business fluctuations correlated with seasonality are concurrent with seasons of the year, holidays, and events like back to school, the Superbowl, and the Olympics.
These are some industries that face some serious seasonality and would be perfect contenders for MCAs:
The most prevalent seasonal factors that impact the restaurant industry are holidays, major events, gas prices, and tourism.
Sales can dip as much as 20 percent during an event or holiday. Business from April to August, the peak months from tourism, drives sales.
Restaurant owners launch marketing campaigns, reduce the staff, expand to delivery and catering, and maintain inventory to combat fluctuations in cash flow. Sometimes those actions are not enough to make up for minuscule cash inflow, which is where MCAs come in handy.
Retailers face large inconsistencies in sales from seasonality as well. This change in sales volume forces retail stores to plan and buy merchandise far in advance with accurate forecasting.
Maybe the restaurant took a bigger dip than it has historically, one that cannot be supported with the current cash flow. Additional financing may be an extra boost that keeps the store in operation.
Cash advance funding may enable retailers to invest in new inventory, prevent staff cuts, and cover overhead.
Businesses like travel agencies, hotels, vacation rental entities, and leisure/entertainment businesses like waterparks, ski-lodges, and bars encounter lulls in business that correlate with the seasonality in tourism. Businesses located in a vacation destination generally suffer from seasonality with tourism.
Peak season may bring in excess cash flow, but businesses may need to weather tough times during the off-season. MCAs can help to calm the storm associated with a decrease in business.
Businesses Dependent on Weather
Outdoor services like landscaping, lawn services, pool services, roof work, snow removal, and other outdoor services clearly deal with weather as a primary factor.
During the off months, some businesses work to repurpose their business. For example, a lawn service may transition to a snow removal service in the winter.
For the businesses that cannot repurpose their core business, an MCA may help them get by during the off-season. Merchant financing is the crutch that helps businesses get through cold times.
Why Businesses Need Financing
Seasonality is not the only force that motivates businesses to obtain merchant cash advances. Businesses may opt for MCAs because of the quick funding, control over remittance of revenue, and easy application and approval with minimal requirements.
Small businesses and startups across all industries need funding to boost working capital, purchase an asset (machinery or vehicles), grow the company, purchase inventory, or restructure debt.
How MCA Investors Choose Businesses
When investing in merchant cash advances, it is important for investors to analyze the businesses’ industry, business plan, resources, growth opportunity, and the reason for taking out merchant financing.
If a business desperately uses this financing to save the business, investors should steer clear unless you have a personal faith in this company. Expansion, seasonality, or the purchase of inventory or an asset may indicate a better financial position.
Investors will want to be on the lookout for businesses in high-growth industries, innovators, industry competition, current events impacting the industry, and historical revenues amongst other financial information. If you’re interested in learning more about MCA’s, read our blog a history of merchant cash advance.
How to Invest In MCAs
Pioneering platforms like Supervest make it easy to invest in merchant cash advances, a high-risk investment, but in a low-risk way.
The platform matches investors with MCA funders based on credentials and the investment portfolio that specifies their preferences. Risk is mitigated because no more than 5% percent of the investment, funneled through MCA funders, is applied to individual businesses.
The diversification of investor portfolios secures large returns. It is a quick, easy, and assured way to make an alternative investment.