Is Merchant Cash Advance Financing the Right one for Your Online Store?
E-commerce businesses are thriving, and online sales are growing increasingly popular every year. Forbes predicts that we’ll see a growth of over 10% in terms of online sales this year. However, many small e-commerce businesses face a capital barrier: they simply don’t have enough cash to invest in their business and seize this spike in demand. Other e-commerce businesses see wildly swinging seasons based on seasonal demand.
There are many possibilities for e-commerce businesses looking for the right financing option. As you navigate the financial market for an upfront amount of cash to fuel your e-commerce business, it’s essential to understand the particulars of different offerings like business loans, cash advances, and merchant cash advances. In this quick guide, we’ll explore the differences between popular financing options, when to consider financing, and how to find a services provider to help your business grow.
What Is Merchant Cash Advance Financing?
Merchant cash advances give businesses a cash infusion, which companies can repay through agreed-upon repayment terms. These advances consider the business’s past sales and performance to offer a personalized cash amount in an upfront lump sum, which the company can use to buy inventory, pay employees, pay for operational expenses and overhead, or manage other costs.
Different merchant cash advance services offer additional terms. They have different repayment requirements and fees, so businesses looking for finances should shop around to find a service that aligns with their needs.
Some of the key benefits of merchant cash advances are:
- Receiving a fast lump sum of cash that your business can immediately use to keep your business afloat or fund growth
- They are unsecured: This means your business doesn’t need to have large amounts of property or inventory assets to secure the loan. Merchant cash advances are particularly valuable for small and e-commerce businesses, which may not have the conventional assets needed to secure business loans.
- Repayment terms tied to business fluctuations: Merchant cash advance models base repayment on the borrower’s sales volume and revenue, which can help businesses maintain a positive cash flow while still making timely repayments.
Merchant Cash Advances vs. Regular Cash Advances
If you’re new to commercial lending options, it can be easy to confuse merchant cash advances and regular cash advances because they sound similar. The key difference between these two options is the nature of repayment.
Most cash advancement models require fixed repayment installments. For example, you may be required to pay $600, $2,000, or $5,000 every month based on the advance terms—regardless of whether your e-commerce business made that much extra revenue for that given month. Companies should be cautious about overextending their finances through traditional cash advances.
Merchant cash advances, on the other hand, tie repayment to the amount of money processed through credit card and debit sales. In this scenario, your organization will make repayments based on a known proportion of your sales, whether you have a high- or a low-volume month.
Merchant Cash Advances vs. Loans
Traditional business loans are also different from merchant cash advances. This financing option does require security; lenders and banks will only give a business money if they have sufficient property or inventory to secure the loan. Loans also often have a fixed or variable interest rate, and the repayments will be due over a fixed loan term. Just like cash advances, this lack of flexibility doesn’t account for slow sales months.
Related: eCommerce Loans: Scale Up in 2023 With a Cash Advance for Your Business
Do You Need Cash?: Common Scenarios for E-Commerce Business Owners
E-commerce businesses are a flexible business opportunity for many people who want to start their own business and see profits without significant capital investment into equipment, space, and employees. However, e-commerce businesses still require cash to manage business expenses such as marketing, inventory, packaging, and financial services.
Your Business Needs Quick Cash Flow
Even with a well-structured and profitable business, cash flow can sometimes dry up because of unexpected expenses or a sudden drop in sales. Merchant cash advances deliver upfront lump sums you can quickly divert to pay business expenses and plan for the future.
Your Business Is Growing, But Low Available Capital Is Holding You Back
In e-commerce, markets shift quickly, and companies thrive when they can quickly seize the opportunities presented by sudden trends and fads without overleveraging their businesses. A merchant cash advance can be the right tool to promptly invest in new inventory and packaging to reach a growing market.
Merchant cash advances can also help you fund more stable growth without waiting to accrue capital.
You Have a Profitable But Seasonal/Cyclical Business
A lot of e-commerce businesses are seasonal. According to the National Retail Federation, many retail companies of all types have 19% of their total sales volume just in November and December holiday sales. Your business may be profitable annually but still see slow months during the off-peak seasons when you must juggle marketing, supply chain relationships, and employee commitments. A merchant cash advance can more than tide you over without jeopardizing those profitable months.
How to Choose the Right Financing Options as an E-Commerce Business Owner
Navigating financing options can be complicated, especially if you’re a new business owner or transitioning to an e-commerce business model. There are lots of green flags your organization can use to find the right fit for a service provider, including:
- Transparent services and terms
- High star ratings and reviews
- Testimonials and referrals from other businesses
However, when searching for merchant cash advance financing, doing your due diligence and shopping for the perfect fit can pay off. Choose a financing partner based on these factors:
- Eligibility requirements
- Repayment structures
- Easy repayment options and cash advance allowances based on the unique needs of e-commerce
- What can happen in a worst-case scenario
Consider the Eligibility Requirements and Application Process
Conventional business loans often have rigid rules and strict eligibility requirements that don’t allow new and growing e-commerce enterprises to participate. Other organizations might require a commitment or hefty initial fees. Instead, look for financing services that qualify or prequalify your business without obligation or fees. The right partner will have a quick, no-commitment application process and can prequalify your company for a set amount of cash.
Related: 15 Ways to Achieve Financial Discipline for your eCommerce Store
Search for the Right Repayment Options
At their cores, financing and cash advances have a fundamental underlying principle: your organization can receive a cash infusion to fuel growth and operations now, and you’ll repay that money in the future. But the specific mechanisms matter and unsuitable repayment terms can cut off your business’s growth at the knees. For example, conventional cash advance services might require a large deposit, weekly or monthly fixed payments, and have a high interest rate or high fees.
Instead, opt for a merchant cash advance financing option that’s more flexible. Adaptive repayment structures will map repayment schedules to online sales volumes. This adaptive model ensures that high fixed costs will be manageable during months with slow sales. It also means that repayment costs won’t balloon disproportionately during productive months.
Along with adaptive repayment structures, look for financing partners that offer transparent and low fees and low or (even better) no interest rates. Examining the fine print of potential merchant cash advances before you start can show your business lots of money in fees and interest.
Is the Service Built for the Unique Needs of E-Commerce Businesses?
There are a lot of cash advance and loan companies. But many don’t specialize in serving e-commerce businesses, which have a different business model and costs from other sales-oriented businesses. As you search for suitable merchant cash advance financing options, focus on prospective companies that understand e-commerce. You can identify these options because they might:
- Provide capital for some of the most pressing needs of e-commerce businesses—such as supply chain and logistics management, inventory purchases, custom packaging, and marketing. Other financing services may not understand the necessity of these expenses for e-commerce businesses and may restrict the use of funds to more conventional business expenses.
- Repayment structures built on sales rather than having fixed weekly or monthly payments
- Assess your business with e-commerce-centric models to make the right cash available to your company. In contrast, other services might evaluate your company through a more limited and conventional lens.
Like e-commerce businesses with unique needs for merchant services, business loans, and supply chain management, your company will see the best results when you choose merchant cash advance financing explicitly formulated for e-commerce.
Know What Happens If You Have a Low Selling Month
Low monthly sales volumes can feel like a nightmare for e-commerce stores that have borrowed money or received a cash advance. What happens to your business if you don’t have the cash to make a fixed payment with harsh late fees or high interest rates? This can leave debt stacking up on your company’s books or force you to give up the business entirely.
Before facing that scenario, look for financing options that can work with you during unexpectedly slow months or off-peak seasons. Adaptive repayment structures, for example, take a portion of your sales instead of a fixed amount that may not fit into your cash flow. Planning for potential disruptions and emergencies before they happen can be a vital step in keeping your company financially healthy and ready for long-term growth.
Choose a Merchant Cash Advance Financing Service That Will Help Your Business Grow
Versatile merchant cash advance financing can help your business grow when you’ve seized upon the right niche, help your operations stay stable during off-peak months, and be part of a diversified business plan that keeps you and your team secure, no matter what happens in the future.
At OnRamp, our team works hard to be a financing partner e-commerce businesses can trust. Our unique business model allows you to get the cash you need now and then pay the money back when your company is selling or hold tight during low sales months. Contact us today to get some capital quickly — the prequalification process is easy, and you can get your personalized cash offer without a commitment!