One of the most typical investments for our retail clients is to buy more inventory. Merchant advances are a fantastic business loan alternative for investing in inventory if you are a retailer. This is not just because merchant advances do not require collateral – but also because the merchant advance payments are variable and dependent on sales. Our clients obtain capital from us, invest it in inventory, and a portion of the sales of that very same inventory is what goes to repay the advance. It’s a full circle win-win!
But when does it really make sense to use a merchant advance? At the end of the day, it all comes down to the numbers. At Merchant Advance Capital we strongly encourage all of our clients to run the numbers and gain an understanding of the key variables that determine whether or not a merchant advance is the right choice. We have even built a sophisticated inventory finance worksheet to help our clients analyze the break-even point of using a merchant advance to acquire inventory.
The key variables in the worksheet are: the cost & anticipated turn-around time of the merchant advance, the gross margin on the product being acquired & sold, and the speed at which the retailer can sell the inventory (measured in the average number of inventory turns per year). Assuming that the existing overheads (i.e. staffing levels, rent, utilities etc.) stay constant, having the additional inventory simply creates extra profit that otherwise would be impossible to generate. Especially if the inventory can be sold quickly and those proceeds subsequently re-invested in inventory again for resale, there can be a substantial opportunity for increased profit through the use of a merchant advance to buy inventory.
Give us a call if you think that extra inventory on your shelves would benefit your business. We would even be happy to send you a copy of our inventory financing worksheet so you can play with the numbers yourself! We look forward to working with you and hope to hear from you soon.
President & CEO
Merchant Advance Capital Ltd.