Merchant Cash Advances For Restaurant Financing

The secret about restaurant financing, or for that matter any financing, is that it works a lot better if the cash becomes available at the exact time when it is needed most. This helps the restaurant build trust with its suppliers and employees as a well funded company. It also helps the restaurant employ more staff, do renovations, advertising and expansions, and do more business.

For these kinds of financing requirements, a traditional loan is like the cavalry in the old westerns that turns up at the end after all the shooting is over and done with. The true hero that can save the day in this case is a merchant cash advance. Let's look into it in more detail, and try to understand the difference between ordinary loans and merchant cash advances (MCAs).

There are four main differences to consider. First, unlike traditional loans that need some form of security, an MCA is unsecured. It doesn't need any security or a down payment, and average credit is usually enough for approval. The approval rate for MCAs is also comparatively very high and very fast (one to seven days).

Secondly, an MCA is a cash advance which can be used for any purpose the restaurant sees fit, including payroll, advertising, promotions, stocking up for large catering orders, etc. This is very different from other modes of restaurant financing which are given for a very specific purpose, such as equipment purchase or other tangible assets. This kind of freedom to use the loan funds offers a lot of breathing space for a business which badly needs money.

Whenever you swipe a credit card of a customer, a specific percentage of the sale amount is credited to the company account. This way, you will slowly repay back the loan. When your business is booming, you the percentage of the company share is higher and when it is low, it is comparatively lower.

Third, there is a huge difference in the repayment method. A traditional loan has fixed monthly payments which the restaurant owner has to meet, irrespective of how the business is doing. MCA repayments, on the other hand, are linked to future credit card receivables. So the payment sent to the creditor is low if the credit card sales volumes are low.

Lastly, there is no interest rate involved with an MCA. This is unlike traditional loans where the amount to be repaid includes the principal plus interest calculated based on the repayment period. An MCA is just a sale of a part of the future credit card receivables at a discount by the restaurant owner to the lender.

As for the numbers, a typical merchant cash advance given to a restaurant is in return for 15-20% of the future credit card sales. This results in a cash advance equivalent to roughly 70-100% of the monthly credit card sales. But advances of upto twice the monthly credit card transaction volumes are possible.

As mentioned above, repayment periods are flexible and linked to sales but on average will be between 6-12 months. The restaurant's back-office systems and POS are reprogrammed so that the lender can monitor the credit card transactions and split processing can be done. This way, the lender automatically receives the amount due and there is no headache to either party related to making or collecting monthly loan payments.