A Merchant Cash Advance (MCA) is a popular form of quick funding for businesses, with 10% of small businesses that sought financing in 2021 opting for an MCA1. It offers flexible repayment terms, but it can also come with high fees and potential strain on cash flow.
In fact, 70% of businesses experience some cash flow issues after taking an MCA. Moreover, the approval rate for MCAs was 84% in 2020, reflecting a high acceptance among lenders. So, how can you improve your credit score and cash flow after taking an MCA?
Let’s explore strategies to manage the 40% market penetration increase since 2015 and navigate the financial landscape post-MCA.
A Merchant Cash Advance (MCA) is a popular form of quick funding for businesses. It offers flexible repayment terms, but it can also come with high fees and potential strain on cash flow.
Understanding MCA and Its Impact on Credit Score and Cash Flow
Merchant Cash Advances (MCAs) are financial products that provide businesses with quick access to capital by purchasing future receivables at a discount. Unlike traditional loans, MCAs are based on future sales and typically require daily or weekly repayments, which can be a fixed amount or a percentage of sales.
MCAs can impact a business’s cash flow due to their repayment structure. Since repayments are made frequently, they can strain the business’s cash flow, especially if sales are lower than expected.
However, some MCA providers may adjust repayments based on actual sales, ensuring that the cash flow impact is proportional to the business’s income.
Credit scores are less affected by MCAs since they are not traditional loans and do not require extensive credit checks. Many MCA providers perform soft credit pulls, and some do not have minimum credit score requirements. This makes MCAs accessible to businesses with lower credit scores.
However, the cost of MCAs can be high, with fees ranging from 20% to 40% more than the principal amount. This cost, along with the frequent repayments, can make MCAs an expensive form of financing compared to traditional loans.
Strategies to Improve Credit Score and Cash Flow Post-MCA
Managing your credit score and cash flow effectively after obtaining a Merchant Cash Advance (MCA) is essential for maintaining financial health and ensuring the sustainability of your business.
Here are detailed strategies to help you achieve this:
1. Timely Repayment
Timely repayment of debts is paramount. Statistics show that payment history accounts for 35% of your credit score. Ensuring that all repayment obligations are met on time can prevent the negative impact of late payments on your credit score.
Late payments can remain on your credit report for up to seven years, potentially reducing your score by a significant margin. Setting up automated payments can be a helpful strategy to avoid late payments.
2. Monitor Cash Flow
Effective cash flow management can lead to identifying growth opportunities and spotting potential problems. Utilizing cash flow management tools allows businesses to track income and expenses accurately.
This monitoring can lead to an average improvement of 10% in profitability. Regular analysis of cash flow statements can also aid in making informed budgeting decisions and ensuring financial stability.
3. Reduce Expenses
Reducing business costs is a direct way to improve cash flow. Strategies such as using technology to automate tasks, going paperless, and renegotiating contracts can lead to substantial savings.
For instance, automating time-consuming tasks can save up to 20% in operational costs. It’s crucial to identify areas where costs can be cut without compromising the quality of business operations.
4. Increase Revenue
Increasing revenue is critical for improving cash flow and repaying the MCA sooner. Implementing effective marketing strategies and optimizing pricing can lead to increased sales.
Diversifying your product range and entering new markets are also viable strategies for revenue growth. For example, expanding your market reach can result in a revenue increase of up to 15%.
5. Consult a Financial Advisor
A financial advisor can provide expert advice tailored to your business’s unique financial situation. They can assist in portfolio management, investment strategies, and risk assessment, which can lead to better financial decision-making.
The value added by a financial advisor can be quantified as a 3% net return per year on your investments.
By implementing these strategies, businesses can not only improve their credit score and cash flow post-MCA but also position themselves for long-term financial success.
Remember, the key is to maintain a balance between managing current obligations and planning for future growth.
Conclusion
Improving your credit score and cash flow after taking a Merchant Cash Advance (MCA) involves careful planning and strategic financial management. By following the strategies mentioned above, you can navigate the potential challenges of an MCA and put your business on the path to financial health.
FAQs
1. What is a Merchant Cash Advance (MCA)?
A. An MCA is a cash advance based on the credit card sales deposited in a business merchant account. It’s a form of quick funding with flexible repayment terms.
2. How can an MCA impact my credit score?
A. If you fail to meet your repayment obligations, MCAs can negatively impact your credit score.
3. How can I improve my cash flow after taking an MCA?
A. You can improve your cash flow by monitoring income and expenses, reducing costs, increasing revenue, and consulting a financial advisor.
4. Can an MCA lead to high fees?
A. Yes, an MCA can come with high fees, which is why it’s important to understand the terms before taking an advance.