Maintaining healthy cash flow is crucial for any small business. During periods of cash flow constraints, businesses may be inclined to seek rapid financing options such as merchant cash advances (MCAs). However, MCAs can also strain cash flow if not used strategically.
In this article, we will share tips for effectively using merchant cash advances to improve your business cash flow. With some planning and discipline, MCAs can be an effective way to access funds and grow your company.
What Are Merchant Cash Advances?
A merchant cash advance offers fast yet short-term funds at fixed rates in exchange for a given percentage of future credit sales. An MCA provider offers you an upfront lump sum that you will be paying off at a fixed percentage of daily credit card receipts.
MCAs are different from loans because the provider buys a share of your future sales instead of lending your money. You don’t have fixed payments; instead, you repay the advance using the money your business earns.
Top Strategies to Manage Cash Flow with Merchant Cash Advances
Below are the top techniques by which you can manage cash flow with MCAs:
1. Assess Your Cash Flow Needs Before Applying
It is essential to thoroughly understand your business’s financial cycles prior to obtaining a merchant cash advance. You should analyse your cash flow patterns first to determine if and when an MCA is needed. Examine historical cash flows to identify any seasonal fluctuations, high-expense periods that regularly outpace revenue, or common cash shortfalls that impact your working capital.
This cash flow analysis helps you predict future money gaps and decide the right amount to borrow. It ensures you don’t borrow too much to manage or too little to fix problems. By planning carefully, you can borrow just the right amount to support your business smoothly, manage money better, and avoid costly repayments. The entire goal is to make sure any outside funding fits your business needs and cash flow well in advance.
2. Choose a Reputable Financial Institution
India’s financial technology sector has brought many merchant cash advance providers to market. However, prudent evaluation is essential since terms and reliability vary greatly. Reputable providers clearly communicate costs via factor rates and structure flexible repayment schedules aligned to a business’s cash flow. Ideal repayment terms link the merchant cash advance payback to daily or weekly sales volumes through a fixed percentage.
The priority is choosing an MCA partner that enables strategic cash flow management rather than worsening financing challenges down the road. Establishing matched expectations from the outset allows the flexibility and convenience such services offer to improve management rather than distract from core operations. Careful selection provides assurance that the MCA supports your business appropriately.
3. Use MCA Funds Strategically
Receiving MCA funds can provide much-needed working capital relief. However, effectively managing the surge of funds is critical. Though urgent business needs may be critical, it is wise to avoid allocating the funds hastily or to non-strategic uses. Instead, channel the merchant cash advance toward targeted investments to help growth, sustain operations, or resolve specific problem areas holding back performance. Examples may include resolving overdue accounts payable to restore relations with key suppliers, acquiring inventory to meet pent-up customer demand in peak seasons, or funding high-ROI marketing activities.
If deployed judiciously, the merchant cash advance presents an opportunity to propel the business forward. Maintaining discipline to direct funds only toward revenue-generating priorities ensures the short-term financing choice strengthens rather than strains existing cash flow cycles. This enables meeting immediate needs while also supporting improved future results.
4. Monitor Daily Sales and Repayments Closely
Since MCA repayments are typically linked to your daily card or digital sales, keeping a close watch on your revenue is essential. In India, where digital transactions via UPI and cards are surging, this is easier with the right tools. Accounting software can be used to track sales and repayments in real time.
Furthermore, alerts from lenders should be set up, if possible, to stay informed about daily deductions and avoid surprises. If sales dip, adjust operations by cutting non-essential expenses to maintain cash flow. This merchant advance cash flow tip ensures repayments remain manageable, especially during quieter periods.
5. Plan for Repayment from Day One
MCA repayments, tied to a percentage of your sales, can vary with your revenue, which adds flexibility but requires foresight. To prevent cash flow shortages, forecast your sales conservatively, assuming moderate revenue to plan repayments.
Set aside a small reserve to cover repayments during slow weeks, acting as a buffer. If possible, negotiate a repayment cap with your provider to limit daily deductions. By planning proactively, you make your merchant advance cash flow strategy sustainable, whereby maintaining your business’s agility and financial stability.
6. Combine MCA with Other Cash Flow Strategies
An MCA is a powerful tool, but it works best when paired with other small business cash flow practices. To ease cash flow pressure, negotiate with suppliers for extended payment terms. Offer discounts to customers who pay invoices early, boosting incoming cash.
Explore new revenue streams, like adding online sales or introducing new products, to stabilise income. By blending quick MCA funding with these tactics, you build a comprehensive cash flow management system that keeps your business resilient in India’s competitive landscape.
7. Review and Learn from Each MCA Cycle
Each MCA is a chance to refine your approach. Once you’ve repaid an advance, take time to reflect on whether the funds addressed the intended cash flow. Whether the repayments were manageable and whether your sales aligned with your expectations. Use these insights to improve your approach for future advances, such as changing the amount you ask for or making better sales predictions. This ongoing process helps you manage your merchant cash advances more effectively, making each advance better suited to your business needs.
Conclusion
Used strategically, merchant cash advances provide critical working capital to take your small business to the next level. However, it is worth noting that MCA repayments could be relatively higher than traditional loans, which is why it is important to consider alternate options.
But on making sure you research reputed providers thoroughly, set prudent limits, invest purposefully, control expenses, and manage billing diligently, MCAs can kickstart growth without putting undue strain on your cash flow.
