At Merchant Advance Capital, we pride ourselves in employing a consultative approach with all of our clients and applicants. A financing relationship is a very deep and sensitive thing where trust, honesty, and reputation are extremely valuable. Our goal isn’t to sell our solution if we don’t believe it is the right solution for that particular client. Although a merchant cash advance is a very powerful and innovative solution, it is not right for everyone.
One of the first things that we look at is a business’s profit margins. A merchant cash advance involves the merchant sacrificing a percentage of future sales in order to pay back its obligation. As a result, there should be some profit margin in the business so that there is something to work with.
If the business is break-even or operating at a loss, then the merchant cash advance will further affect the merchant’s cash flow negatively. Of course, the funds from the cash advance should be used to grow the business (spent on expansion, advertising, inventory, renovation etc.). This offsets the effect that the merchant cash advance has on the business’s cash flow, but it takes some time before growth capital takes root and provides a meaningful increase in a company’s sales. So essentially, we want to make sure that a business’s operations have already achieved a certain level of profitability so that we are confident in its ability to service the cash advance. This not only lowers the risk profile of our cash advance but it’s in the best interest of the client!
Otherwise the funds we initially advance are the same funds that need to be used to pay back the obligation, because the operations aren’t at a level to be able to support the cash advance. This minimizes the usefulness and positive effect that a merchant cash advance is meant to have on a business.
So, before a business is profitable, it probably makes more sense to find an equity partner who won’t impact the business’s cash flow as part of the financing transaction. We are sensitive to the fact that what makes sense really depends on the stage that each business is at!