Can MCAs Create Cash-Flow Stress During Slow Months?

In a short period, you secured a Merchant Cash Advance to revamp the kitchen, and business is in full swing. Business is good, and sales are strong, and those daily payments are coming out of the register without a struggle. Everything is good, and then, seemingly overnight, the tourists are gone, the weather turns ugly, and back to school sales roll in, and now you're watching your sales plummet by 40 percent. And those payments you made with ease last month aren't so painless anymore because of the shrinking cash flow, and hello cash flow stress paradox with merchant cash advances!

The Double-Edged Sword of Percentage-Based Payments 

What works well about MCAs in theory is easy: you pay a fraction of your daily credit card transactions, typically between 10% and 20%. This may seem like chump change when your business is booming and making $10,000 per day and only costing you $1,500 in daily payouts. You are still making $8,500 to spend. The idea is that it pays in kind;  as your sales decrease, so does your payment, right?

Technical Answer: Yes. If you are selling $5,000 a day, your 15% holdback will be $750 compared with $1,500. Sounds like a pretty good deal. Reality, though? You are sending in less money, but you are not reducing your expenses. Your rent isn’t going down. Your utility bills will not decrease. Your insurance rates are not adjusting for the season. Now, $750 can hurt more than $1,500 when the cash isn’t flowing as well as it used to, and you are working with a smaller pie cut into thinner pieces, so every piece counts.

The Slow-Motion Squeeze

However, the cash flow pressure from MCAs becomes a factor in slow months in a rather sneaky manner. It’s not a loud bang on the door but a drip-drip effect instead. Rather than a single balloon payment, it’s a percentage amount daily draw-down even when your income becomes nothing short of a trickle. In a rather unsettling and frustrating manner, you view the bank mobile phone application daily with a certain portion withdrawn.

Seasonal businesses are especially hard hit by this. Think of an assortment of businesses that opened an MCA in May to finance for the summer months when it was busier. By October, it's deserted, but they still have three months to repay their MCA when it's really needed to stay in business. The cost of 3% may be lower, but it stings that much harder.

When The Math Stops Working

“The actual risk occurs during the low months when the revenue barely covers the operational expenses even before the MCA holdback begins. If the operational cost is $15,000 each month and you get $20,000 from the credit card sales during a low month, it looks good with $5,000 to fall back. But the 15% MCA holdback reduces this to $3,000.” Then you can expect an unexpected cost to pop up: the freezer could break down or there could be an urgent need to compensate an employee; the point is, you'll be in the hole.

This is known as the “MCA spiral.” A cash crunch occurs when times are slow, and businessmen find themselves forced to make ends meet through yet another MCA, which increases the daily hold back and makes it difficult to come out of the next slow period.

The Survival Strategy 

Does this mean MCAs are always a cash-flow disaster during slow months? Not necessarily. The key is brutal honesty about your revenue patterns before you sign anything. Calculate your worst-case scenario: What happens if sales drop 50%? Can you still operate with the holdback active? If the answer is no, an MCA might not be your best funding option, or you need a much smaller advance than you originally wanted.

MCAs can be powerful tools when used strategically, but they're not forgiving during lean times. The flexibility of percentage-based payments is real, but it doesn't make your fixed expenses flexible too, and that's where the cash-flow stress lives.