How Do MCAs Support Short-Term Business Growth?

The email dated 2:47 PM on Wednesday almost ended up in the spam folder for Lisa. The subject: “Liquidation Sale: Premium Handbags 65% Below Wholesale.” Lisa’s boutique catered to just such brands, and the wholesaler was one she had been doing business with for some time. There was one hitch: the offer was good until Friday at 5 PM, the purchase must be paid for in advance, and $28,000 was the largest inventory purchase in two years for her.

She calculated the figures in her head. The price these bags wholesaled for was 80,000 dollars, so she could retail them for 120,000 dollars. This would be 40,000 dollars gross profit on an investment of 28,000 dollars, about 143% ROI. However, her business account reflected 12,000 dollars, while the credit cards were holding 8,000 dollars from last month’s usual merchandise.

"Lisa received the approval for the $30,000 merchant cash advance" on Thursday afternoon. The payment was wired to the wholesaler no later than Friday 3 PM. On Saturday morning, the Instagram post regarding the "Designer Handbag Event" received 847 likes and 93 comments. By the end of the month, Lisa generated sales of $118,000 in handbags, accumulated gross profit of $38,000, and paid $7,200 toward the MCA.

The MCA would thus amount to

Speed that Accelerates

• Business growth doesn’t wait for slow funding. Loans involve applications, documents, underwriting, and approvable procedures that could take anywhere between 30 to 90 days. This could mean the liquidation sale is already over and a competitor could already have established a location nearby.
• MCAs shorten this timeframe to as little as 24 to 72 hours. “Monday morning, get approval on Monday afternoon, and money on Tuesday. This is what makes opportunities turn into reality.” In Lisa’s instance, she had only 48 hours to act on her handbag business, as “no traditional source of capital could possibly move at this speed, which meant the opportunity would simply fall to whoever had access to capital.”
• The cost of speed is not random, it's called option value. It's like having capital ready when opportunities arise so you get to move first, ahead of those lining up at the bank.

Seasonal Financing, Aligned With the Cycle

• Many companies experience growth in predictable waves that require large capital investments before the revenue begins. Retailers build inventory for holiday periods, landscape services in the spring for summer, and pool maintenance services for the summer season.
• MCAs arranged to synchronize with these cycles will fund capital during the preparation phase and repay during periods when revenues are high. A seasonal business might borrow a $40,000 MCA in March, purchase equipment and inventory, and repay as revenues flow in during the summer as opposed to making fixed payments during the winter when revenues are lower.
• This harmonization enables funding to complement, rather than conflict with, cash flow.

Gaining Share During Competitor Weakness

• Smart growth may mean taking down competitors a piece at a time as they make mistakes. When Marcus saw a rival’s sign declare them “Going Out Of Business,” he maybe had a couple of weeks before a new restaurant showed up. He wanted access to money fast for a big marketing assault to attract customers away from a rival. The $15,000 MCA gave funding in 48 hours to advertise with Facebook and mail to attract customers.
• The campaign took $15,000 directly plus an MCA fee of $4,500 but acquired a regular customer base of 340 people, which translates to a potential monthly profit of $8,500 with a yearly profit of more than $100,000. The short-term profit is insignificantly small given its future returns.

How to Scale What Works?

When an electoral campaign or product achieves hitting 3x returns, it is important to scale as soon as possible. If it is a location model performing well, it is necessary to replicate it while favorable conditions persist. The traditional funding system is quite passive because it allows scaling times to fall through the cracks. MCAs allow scaling while the iron is hot, even if it is costly.

Equipments for Capacity Building

• Demand may exceed what can be done with what is in use. A bakery could support an additional oven, thereby serving 50% more customers, while with another styling station, a salon could serve 30% more clients, and an auto shop could support 40% more with another lift.
• Such investments soon bear fruit. The very next day after the arrival of a baking oven, there is an increase in production. Then comes a new styling station and additional bays. MCA funding, though expensive, helps generate immediate profits rather than waiting for several months to obtain bank funding. 

Emergency Growth Orchestrated 

However, not every moment for growth can be planned for. A big client opportunity popping up unexpectedly or a surge going viral can require a quick expansion. Unplanned peaks offer the best opportunities since competitors won't be prepared either. MCAs provide the power to quickly react to lost opportunities to grow. 

Bottom Line 

A merchant cash advance can be an invaluable means to quickly acquire capital in order to seize an opportunity that a traditional loan application might not be able to in time. A merchant cash advance can be a great tool if it is time-sensitive, the payoffs reward it, and it remains strategic. The handbag business was a prime example of shrewd MCA utilization: obvious opportunity, realistic time frame, known ROI, and single-term investment. 

While the $9,000 MCA investment costs were substantial, it paved the way for a $38,000 profit stream that would not have been possible with timely capital infusion. The question isn’t whether MCAs are pricey (which they are) but whether MCAs drive profitable growth that wouldn’t occur otherwise. If so, then the pricey part of the MCA is an investment. Growth won’t wait for optimal financing and must occur when ready entities take decisive steps during key instances. Sometimes expensive capital is the cost of admission for better chances in life. $9,000 in fees over four months. Nevertheless, the $28,000 gamble paid off with a profit of $38,000. This profit would still be $29,000 once the cost of the financing has been taken into consideration. This was money beyond the initial stake