Sign up for Funding Circle newsletter!
Get our latest news and information on business finance, management and growth.
Updated: December 8th, 2020
If your small business is in the retail industry or is seasonal in nature, the holiday season tends to be the busiest. Small businesses everywhere are gearing up for one of their strongest sales periods of the year with the holiday season right around the corner.
Cash flow is already tight for many business owners, but that doesn’t mean you need to hold back. Whether it means replenishing inventory to fill the shelves or hiring additional help to help out during the busy season, you should be able to meet your business needs. There are plenty of financing options out there. This includes merchant-cash advances – or MCAs – which may be different from loans but can still help maximize holiday sales.
MCAs are especially helpful for seasonal businesses. This is because of the way this type of financing is structured. Basically, an MCA is a way to cash-in on future sales now to cover your short-term needs. It is a way to stay nimble so that business adaptability can stay a strong part of your strategy.
If you’re bracing for your busiest season during the holidays, the idea is to take advantage of your future sales to borrow your cash advance. MCAs are ideal for businesses with high credit card sales volume. The merchant cash advance companies capture a percentage of these daily sales in order to be repaid for the advance.
The last thing you want during the busy holiday season is to be left behind because you couldn’t replenish your shelves. An MCA can give you the cash you need in your account quickly to buy inventory you need to keep customers happy.
If you’re typically busier during the holiday season, you might find yourself short-handed. As a result, you could be searching for additional part-time help to get you through these final weeks of the year. A bigger payroll doesn’t have to bleed you dry, and an MCA can help carry you through.
Another way to use an MCA to help maximize your holiday sales is to capitalize on the momentum to cover other large one-time expenses, such as moving to a new location or opening a separate office. For example, you’ll need to come up with enough funds for additional expenses such as a security deposit and the first month’s rent when you move. By accessing an MCA, you can get the funds you need and while keeping the business running.
First and foremost, an MCA is technically not a loan — it’s a cash advance. With a loan, you can expect to receive a lump-sum amount in your account that you will pay off via monthly installments. This might be fixed or variable interest rate over a specified period of time, whether it’s a short-term or long-term loan. Basically, you as the business owner know what to expect and can budget accordingly.
With an MCA, you will also receive an upfront amount – whether it’s $5,000 or $500,000 – though this is where the similarities end. Instead of being limited to going to a traditional lender, business owners have options. You can choose from a number of merchant cash advance companies, which provide the funding. By choosing this route, it is not uncommon for small business owners to start with what’s known as an independent sales organization, or ISO. An ISO has relationships with various MCA companies who they can match with the business owner. Upon approval, you receive the funds into your account.
You can also apply through alternative lenders like Funding Circle where a dedicated Account Manager will walk you through the entire process so you know what to expect. By applying for an MCA through Funding Circle’s network of partner lenders, you can expect quality service and the following terms:
Payments are tied to your daily credit card sales, a percentage of which goes to the MCA provider. As a result, the amount you pay each day or week will likely fluctuate depending on your sales volume. Something to keep in mind is that the interest rates on MCAs can be higher than other financing options (like term loans) and are based on what’s known as a factor rate (learn more about factor rates here). Factor rates generally fall in the range of 1.1 to 1.5.
MCAs can be a useful tool in helping business owners maximize holiday sales. But there are risks, such as high interest rates and it is easy to “stack” multiple MCAs on top of one another. These could threaten to eat up all of the business’ cash flow. Going into the process knowing what MCAs are and how they work will help to prevent you from falling into any of these traps.