The United States government offered a number of relief and stimulus funding options through the Small Business Administration (SBA) during the first year of the COVID-19 pandemic, including the widely-used Paycheck Protection Program (PPP).
Many small businesses were able to access funding through these sources, but PPP and other programs have since closed, leaving many businesses short as they continue to navigate capacity limits, changing guidelines, staff shortages, and the threat of temporary closure.
Other funding options exist to aid in COVID-19 recovery, including the popular SBA 7(a) Guaranteed Loans program and other traditional lending options offered by banks and credit unions, but these options have very strict approval requirements and only the strongest businesses are approved. This excludes many deserving small businesses, including those that experienced drops in revenue over the COVID-19 pandemic. Without cash reserves or property to fall back on, these small businesses may not be able to provide a down payment or offer collateral to prove their creditworthiness and secure approval for these funding options.
If your small business needs funding to recover and continue to grow during the COVID-19 pandemic but you don’t meet the strict requirements of the SBA and other lenders, don’t panic. There are a number of alternative funding options available to you, including flexible funding like merchant cash advances (MCAs).
Merchant cash advances emerged after the 2008 recession in response to a growing need for accessible small business funding. Available from direct online lenders like Greenbox Capital®, MCAs have flexible approval requirements and a streamlined application that makes more funding available to businesses that are typically underserved by the SBA and other traditional lenders, including women-, minority-, and veteran-owned businesses.
Before we take a look at how merchant cash advances can help businesses recover from COVID-19 closures, it helps to understand what merchant cash advances are and how they work. Keep reading to learn more.
What is a Merchant Cash Advance?
A merchant cash advance is technically not a loan—it’s actually a non-loan form of financing known as an “asset purchase” or a “purchase of future receivables”. This means that a lender essentially purchases a portion of your business’s future revenue in exchange for cash up front. You’ll receive an advance of working capital when you need it, and the lender will receive a portion of your daily or weekly debit and credit card sales until the advance has been repaid (along with any fees).
MCAs are controlled under different regulations than traditional loans and lenders. These regulations can vary from state to state and are generally not as strict as those that govern banks and other traditional lenders, allowing alternative lenders like Greenbox Capital to offer customized terms and flexible funding that is tailored to the needs of the borrower.
Learn more about merchant cash advances and what they’re used for.
How Do Merchant Cash Advances Work?
MCAs work differently than other types of funding like 7(a) Guaranteed Loans or other traditional lending options. Here’s what you need to know about how MCAs work:
- Different lenders: Merchant cash advances are available from direct online lenders like Greenbox Capital, not traditional banks. These lenders have different approval requirements that make it easier for businesses that don’t have an established relationship with a lender to qualify, including businesses that don’t meet the strict approval requirements of these lenders, younger businesses, and businesses in riskier industries.
- Simpler application: MCAs have a much shorter application, with less restrictive approval requirements and no collateral required. Simply submit a short online form and the lender will contact you to finish the application. Depending on how quickly you are able to supply the requested information, you could receive your funding in as little as one business day. This makes MCAs ideal for businesses that need working capital fast, or who don’t have the time to navigate the complicated application process of a bank or the SBA.
- Funding amount: Up to $500,000 is available. Funding amounts are based on your future sales and not just your credit history.
- Repayment: Instead of set monthly payments, MCA payments are automatically deducted from your daily or weekly credit and debit card sales. Payment amounts are based on your sales, so they’ll be higher on days when you have higher sales, and lower on days when you have fewer sales.
- Uses: There are no restrictions on how merchant cash advance funding is used, but it is typically best used to support growth initiatives that will increase your revenue, such as purchasing inventory or raw materials in bulk, boosting your marketing, investing in training and continuing education, or taking advantage of time-sensitive opportunities to grow.
How Can a Merchant Cash Advance Help My Business Recover from COVID-19?
MCAs offer a number of advantages that can help businesses recover and grow as the COVID-19 pandemic continues. Here are 6 reasons to consider a merchant cash advance:
1. They’re fast
Depending on how quickly you are able to supply the requested paperwork, you could receive your funding in as little as one business day. The SBA and banks, on the other hand, can take weeks or months to approve your applicatio
2. They don’t require collateral or a down payment
Traditional lenders generally prefer to grant loans to wealthy business owners with property, excluding many deserving small business owners and preventing them from accessing the funding they need to recover and continue to grow. A down payment is also often required.
Merchant cash advances do not require collateral or a down payment. Instead, approvals are based more on your business’s future earning potential.
3. Approval requirements are more flexible
Alternative lenders provide financing based on the revenue of a business, with more emphasis on the future potential of your business, and not just your credit and financial history. Your credit score will be considered, but it will be considered alongside other indicators of your business’s financial health, making MCA funding accessible to more businesses who might not meet the strict requirements of the SBA or other traditional lenders.
4. Time in business requirements are lower
Traditional lenders often require up to three years worth of detailed personal and business financial documentation. Alternative lenders, on the other hand, require businesses to be in operation for a minimum of six months, which means younger businesses that can’t get funding from other sources may be able to access the funding they need from direct online lenders.
5. Payments are tied to cash flow
Traditional loans are typically repaid in set monthly instalments, without the flexibility to change the payment amount or schedule.
MCA payments are automatically deducted from your business’s daily or weekly debit and credit care sales, with payments based on sales amounts. Payments will be higher on days or weeks with more sales, and lower on days and weeks with fewer sales. This flexibility can be beneficial to businesses who are recovering from COVID-19 closures because they won’t need to worry about being able to make a set monthly payment in months with lower sales or tighter cash flow.
6. There are no restrictions on how funds are used
Federal COVID-19 relief programs and other traditional lending products often restrict how funds can be used—PPP funding, for example, was only forgivable if a certain percentage was used to cover payroll costs.
There are no restrictions on how MCA funding can be used, which means small business owners can use their funding however they want to recover from COVID-19 and continue to grow. Keep reading to learn how to use a merchant cash advance for COVID-19 recovery.
How To Use a Merchant Cash Advance for COVID-19 Recovery
Here are some of the most popular ways to use MCA funding:
1. Additional cash flow
Lack of working capital or cash flow is the most common challenge faced by small businesses in any industry. Uncontrollable global events like the COVID-19 pandemic, as well as normal operational challenges like long accounts receivable periods, predictable seasonal changes in revenue, unplanned employee turnover, and other unexpected expenses can all put additional strain on your business’s cash flow.
Merchant cash advance funding can help fill these gaps, providing you with the working capital you need to maintain normal operations when cash flow is tight.
2. Responding to unexpected expenses
Unexpected expenses like onboarding new employees or repairing equipment can create cash flow challenges that may make it hard to maintain normal operations or continue to grow. MCA funding can be used to cover unexpected expenses like hiring and training new employees or repairing costly equipment so you can keep operating as usual without putting your growth plans on the back burner.
3. Fueling your growth
There are no restrictions on how merchant cash advances are used, but MCA funding is typically best used to support growth initiatives that will increase your revenue, such as:
- Purchasing inventory in bulk to reduce costs, or to stock up before your busy season or an upcoming promotion without straining your cash flow before profits start rolling in
- Purchasing raw materials to bid for or get started on large projects before clients pay
- Boosting marketing and advertising to attract new customers and clients
- Hiring new employees so you can offer new services or expand your team and grow your business
- Purchasing new equipment
- Remodelling or expanding your space
- Investing in training and education to open up new revenue streams, enable you to offer more services, and continue to grow
Merchant Cash Advances for COVID-19 Recovery
Many small businesses were significantly impacted by the COVID-19 pandemic—nearly half of businesses surveyed in a recent study by PNAS experienced temporary closures, and three quarters of those surveyed had enough cash on hand to last 2 months or less. With federal funding provided by the CARES Act, including PPP funding, no longer available, many small business owners are in a tough spot as the pandemic continues and they begin the process of recovering and continue to grow.
Alternative funding like merchant cash advances is easier to access than traditional funding options like SBA 7(a) Guaranteed Loans and bank loans from traditional lenders. With flexible approval requirements and a streamlined application process, direct online lenders like Greenbox Capital are making more funding available to small businesses recovering from the COVID-19 pandemic, in some cases in as little as one business day.
- “The impact of COVID-19 on small business outcomes and expectations.” Alexander Bartik et al. PNAS. July 28, 2020.