Merchant cash advances are a great way for modern eCommerce businesses to fund their growing company, however, they require a very fast payback schedule, and if a business is unprepared, they could find themselves potentially defaulting on their loan.
When you decide to use revenue-based financing as the main way to fund your business, follow these tips to avoid defaulting on a merchant cash advance.
In All Things, Prioritize Your Lenders First
When you take on outside funding for your business, you should be 100% certain that you will be able to pay it back.
A good rule to stand by for yourself when taking on outside money is to Prioritize Your Lenders.
That means above all other expenses for your business, make sure that the people who lend you money are first priority when it comes to paying out.
The big reason for this is that if unexpected financial circumstances hit your business, and you are in good standing with your lender, you will always have access to emergency funds to handle those unexpected events.
By contrast, if you decide to do something like default on a loan from a lender when you need emergency funds (or any funding in the future) your current lender will not provide you with the cash you need, and it’s possible other lenders won’t either.
So, to avoid a default, always make sure you don’t let it get as far as defaulting so you can still have options with lenders to help prevent anything bad from happening.
Map Out Your Expenses
Running your business, you will be accustomed to the kind of expenses you repeatedly encounter.
For most eCommerce businesses, the biggest recurring expenses are inventory purchasing, advertising, and paying other people (either as employees or for services).
If you take on a merchant cash advance, make sure you are aware of all future expenses coming up within the payback period of the loan so as to not get caught off guard by a sudden big expense.
An unexpectedly large expense can put you at risk of defaulting on your merchant cash advance, so if you have your expenses mapped out, there’s no way to get surprised.
Take Only the Exact Amount of Funding You Need
Every dollar you get loaned has an attached fee, and those fees come directly out of your bottom line.
For that reason, you should never take more than you need.
By the same token, if you take too little funding, you will be short on big upcoming expenses, and that can potentially hurt future revenue that will be used toward paying back your loan.
In tandem with tip #1, use your mapped-out expenses to ascertain the exact amount of funding you need to minimize the risk of putting your future revenue at risk.
Keep Seasonality in Mind
Almost all products are affected by seasonality.
If you’ve been in business for a few years, you should know what your high months are, and what your low months are.
When you take funding, calculate how much more or less than usual you will need depending on the seasonality of your products, as getting it wrong in either direction can hurt your ability to repay a merchant cash advance that has a smaller payback window than a traditional loan.
Manage Your Inventory Well and Prevent Stock-Outs
Inventory management is extremely tricky for eCommerce businesses.
If you sell on multiple channels, you’ll have to portion off parts of your inventory so they are inaccessible to each other, and poorly predicting how much inventory you need (either too much or too little) will either cause a glut of inventory hurting your margins or will cause a stockout.
Stockouts are devastating for eCommerce businesses and can be one of the reasons a seller will default on a loan.
To prevent this scenario, plan the management of your inventory well, use software if you need to, and put it all together to take the perfect amount of funding for your business to maximize profits.
Only Use Merchant Cash Advance Funding For a Few Expenses
If you’re deciding to take on revenue-based financing, make sure you use the money for a few select reasons, and not as a piggy bank for any expense your business may incur.
Typically, MCAs go toward inventory restocking as a primary function, and then you can have a few other reasons to take on them like new product creation, advertising, or paying yourself a consistent salary.
It is smartest to pare down the number of uses for funding as possible, as it will generally keep the amount to borrow lower, so you can have an easier time paying it back, lowering the risk of default.
Take out a Term Loan to Stretch Out Payments
If you are expecting to not be able to pay a future merchant cash advance payment, then it might be a good idea to take on a more traditional style loan to pay off your MCA balance and give you the time you need to pay.
You will take a hit in terms of fees and interest paid over time, but you will not ruin your ability to borrow money in the future and your business can continue to grow without having the extra stress of a defaulted loan to deal with.
See what your options are for getting a different source of funding to pay off your merchant cash advance. If the amount isn’t too large, you could even take out a personal loan to pay off your MCA balance and quickly pay that off.
With these tips, you can ensure you’ll never default on a merchant cash advance, and if you’re close to defaulting, provide some help to avoid this from occurring.
Cash management is one of those unfortunately boring, yet essential aspects of your business that can be the deciding factor between success and having to close your business.