Why Do Retail Shops Choose Merchant Cash Advances Over Bank Loans?

The Merciless Rejection Which Became a Door-Opener

Jessica operates a small boutique and needed 35k for fall stock. So, she did what most of us would: she walked into her bank. She had been a loyal customer for six years, enjoyed healthy balances, and was generating a steady $120K in yearly revenue with reliable monthly sales.

The loan officer studied her file and grew increasingly uneasy. "Your profit margin is a slim 8%, you've only been in business for 18 months, and your personal credit score sits at 648. We need at least 680, two years of operation, and ideally margins around 12%. I'm sorry, but this doesn't meet our criteria.

Jessica stormed out, furious. Her shop was profitable, in growth, and her customers loved her. But to the bank, she was just numbers that didn't tick its boxes.

It wasn't until two weeks later that a wholesale supplier called with a compelling proposition: high-quality inventory, 45% off of retail, if she could commit by this Friday. The potential profit was huge, but she needed that 35k, and she needed it fast.

She turned to a merchant cash advance, almost as a last resort. Her application was approved in less than 36 hours. By Thursday afternoon, the funds were in her account; by Friday morning, she could lock in the inventory that would drive about 62k in sales over the next eight weeks. The MCA filled in the gap, where either the bank loan wouldn’t or couldn’t come through, and therefore was too slow or too uncertain, opening up a profitable opportunity which had also secured the traditional loan in a way it couldn’t compare.

The Speed That Can't Be Beaten

“Retail is detail. And nothing in retail runs on deadlines.” Or so the saying goes. There are cut-off dates for some of the seasonal orders. Slot space in the wholesale market evaporates quickly. Equipment glitches come at critical points in time.

Jessica could not wait for a two-month approval process from a bank for her Friday deadline for a wholesale opportunity that would soon be available to the retailer with a quick plan and fast action for funding.

MCAs have repayment terms as low as 48 to 72 hours. Speed is what will make or break this retail business, so fast beats cheap in this case. The expensive capital coming Tuesday is preferable to cheap capital in two months.

The Credit Flexibility Retailers Need

Retailers often start out having imperfect credit. Credit issues are independent of what they are doing for business. Credit card lines are maxed out to pay for new business startup costs. Financial affairs are temporarily messy for retail business startups. Old business failures create bankruptcy trails.

The banks see Jessica's score of 648 and automatically deny. The MCA lenders evaluate the cash flow at issue, the $120,000 per year and $10,000 per month card processing, and approve based on current business performance, not past credit errors.

This flexibility in credit means that sources of funding can be made available to small shops, which generally would not be considered by regular banks despite the business itself being viable as well as lucrative.

The Seasonal Payment Advantage

The retail business has fluctuations. Jessica’s retail business makes $18,000 each summer and fall but only around $7,000 during winter and early spring. The loan Jessica took out with the bank, which needed a $1,200 monthly payment regardless of the time of the year, was stressful since it was due during a time when business was not generating much cash. The MCAs adjust automatically. The 14% hold-back payment she will receive could amount to $2,520 in the peak seasons where cash is readily available and $980 in the lean seasons where the availability of cash is a concern. The payment schedule aligns with retail rather than competing against it.

Collateral Damage

Community Assertion

Small-scale retailers often consider their premises and stock as consigned or use money provided by suppliers and so own nothing that can be used as collateral. Jessica does not own her store premises, her shelves are also not hers but leased, and most of her stock is consigned. There is nothing here that can be used for collateral. Secured loans require collateral. MCAs don’t require collateral and so emerge as a viable alternative when secured loans are not feasible.

The Accessibility That Matters

Banks reject loans to small businesses in 70% of applications. The approval percentage for MCA lenders is 60%-70%. For retail businesses requiring finances but not meeting banking criteria, this chasm in availability is exactly why MCAs are necessary. Jessica represents a multitude of retail entrepreneurs in this regard. Her profit margins are 8%, not 12%. Her credit rating is 648, not 680. She's been in business 18 months, not 24. The difference barely affected businesses, yet everything for an algorithm to determine risk. 

The Cost versus Access Dilemma 

Jessica’s $35,000 MCA had about $11,550 in fees over six months. Financing with the bank would’ve been around $1,800 over six months. Jessica paid $9,750 more financing costs with the MCA option. However, this financing allowed for access to stock that generated $62,000 in sales with $24,800 in  gross profit. Taking the costs of the MCA into consideration, Jessica realized $13,250 profit that wouldn’t be there if she had opted to wait for the bank loan, which probably wouldn’t come anyway.

The Bottom Line

“Retail businesses prefer MCAs over lending from banks not because MCAs somehow outshine lending in theory, but because MCAs actually fit retail life’s tight deadlines, seasonal cash flow patterns, problematic credit, lack of collateral, and being denied credit by conventional banks.”

Jessica didn’t have a need for big-budget funding in and of itself. Jessica needed any funding that would accept her worthy business concern and provide funds at a pace that, quite literally, was quick enough to make a difference. In this regard, the MCA offered what banks failed to: funds that are within reach and have the speed of retail funding despite its cost of capital.

At other times, the more expensive option you can possibly secure will outdo the less expensive option that never materializes anyway.