Most small businesses start out with working capital that is sourced from personal savings and angel investors, or loans from family or friends.  Trade credit is often relied upon to expand the business in its early stages, but this practical for only certain types of retail businesses.

As the business grows, sometimes a bank loan can be secured to fund expansion, but usually this requires providing collateral, such as a residential property, to guarantee the loan.  Unsecured bank loans are much harder for small businesses to obtain until they have been trading for several years.

More often than not, businesses have to turn to finance companies for unsecured loans, but the fixed repayment schedules associated with these types of loans may not suit the type of expansion that the business wishes to undertake. Whatever type of funding is ultimately secured, it is typically on much less favorable terms that would apply to larger businesses.

However, for businesses that are turning over more than $10,000 a month in credit and debit card sales, there is an alternative source of working capital called merchant cash advances, which overcomes the problems associated with fixed repayment loans.

What are merchant cash advances?

Merchant cash advances — which are also known as merchant capital advances — are unlike normal business loans because they are cash advances on future credit and debit card sales, and therefore the repayments are tied to the sales revenue of the business, and not to a fixed monthly repayment schedule.

This means that when sales increase, the repayments are higher and the advance is paid off faster. Conversely, if sales slow down, the repayments are lower, so the business does not start experiencing cash flow problems as it would if committed to fixed monthly loan repayments.

The repayments are calculated as a percentage of credit and debit card sales, and that percentage is automatically credited to the finance company providing the advance to pay down the debt, each time a sale is made on a credit and debit card.

One such company, Beyond Merchant Capital, has made this easy to do by partnering with First Data, who provide the EFTPOS terminals that process the card payments. The terminals can be programmed to make the automatic loan repayments. The company calls this method of loan repayment ‘Pay As You Trade’ — a term that aptly describes the concept.

For what purpose can the advances be used?

Merchant cash advances can be used for any legitimate business purpose, but they are particularly suited to funding opportunities for expansion where the business owner is confident that such expansion will result in increased sales revenues, and for taking advantage of opportunities for seasonal sales increases.

It’s important that the business owner be aware of what proportion of the increased sales revenues is profit, because that profit amount needs to exceed the cost of the additional capital that was injected into the business — or in other words, the profit generated from the increased sales must exceed the interest cost of the cash advance received.

Other types of business expansion such as opening new premises and taking on additional staff can also be funded through merchant cash advances, provided the lag time between the receipt of the new capital and the resulting increases in revenues is not too long. The same profit to capital cost analysis needs to be undertaken, but because the repayments in these examples may be over a longer period, the interest paid may be higher.

Most financiers that provide merchant cash advances work closely with their clients to help them to undertake these analyses to ensure that the amount of the cash advances are at an optimal level to assist the business to grow — thus ensuring that the partnership between the small business and the financier is a successful one.

Can advances be rolled over after repayment?

Once a business has been through its first cycle of applying for a merchant cash advance and repaying the loan, it can apply again for another advance — which may be a higher amount if the first advance resulted in the business achieving a higher level of average monthly sales. Thus the business can keep rolling over its advances to increase sales revenues.

Around 80 percent of small business clients using merchant cash advances reapply for cash advances after their first advances have been paid off, indicating a high level of satisfaction with this method of financing.

Another advantage of merchant cash advances over traditional business loans is that the application process can be undertaken online, and funding provided within 48 hours. This can enable businesses to take advantage of unanticipated upturns in business that require more inventory or staff to fully leverage — something that could not be achieved through normal loan application processes.

Merchant cash advances can’t replace the need for a solid working capital base, but they can be effectively used to fund expansion and growth, provided the business owner is closely tracking cash flow and profitability.

By Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to

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