How Restaurants Can Benefit from Merchant Cash Advances

Restaurants are a tough business. The margins are razor thin, and things can go south real fast if you hit a slow period. But restaurants also need money to grow – to open new locations, renovate, add staff, purchase equipment, etc. Securing financing through traditional means isn’t always easy for restaurants though. Their balance sheets often don’t look attractive to banks. This is where merchant cash advances can come in handy.

What is a Merchant Cash Advance?

A merchant cash advance (MCA) provides restaurants with capital in exchange for a percentage of future credit card sales. It’s not a loan – there’s no set repayment schedule or interest. Instead, the MCA provider takes a certain percentage of daily credit card receipts until the advance has been repaid.

The amount advanced is usually between $5,000 and $500,000. The payback period depends on the restaurant’s credit card volume, but is often 3-18 months. The cost of an MCA is stated as a factor rate – usually between 1.1-1.5. So if a restaurant gets a $100,000 advance at a factor of 1.3, they will repay $130,000 as money is deducted from their credit card transactions.

Benefits for Restaurants

There are a number of reasons an MCA can be beneficial for restaurants:

Quick Access to Capital

The biggest advantage of an MCA is the speed at which restaurants can access capital. Because MCA providers analyze a business’s credit card receipts rather than traditional metrics like credit scores or collateral, restaurants can get approved in as little as 24 hours and funded in a few days. This rapid influx of capital enables restaurants to quickly act on time-sensitive needs.

Flexible Qualifications

MCA providers offer more flexible qualification standards than banks. They focus more on credit card volume than credit scores. This allows newer restaurants and those with past financial troubles to still get approved. The only hard requirements are usually 6+ months in business and minimum monthly credit card sales.

No Collateral Required

Unlike bank loans, MCAs don’t require any collateral to secure financing. The MCA provider’s repayment comes from a percentage of future sales. So the credit card receipts themselves act as the “collateral.” This removes a major obstacle to financing for many restaurants.

Payments Fluctuate with Sales

One of the best features of an MCA is that the payback fluctuates based on the restaurant’s credit card sales. When sales are down, less money is deducted. This flexible system prevents cash flow issues that can happen with fixed loan payments.

Use Funds for Any Purpose

Restaurants can use MCA funds for virtually anything – making payroll, renovations, new equipment, inventory, marketing, etc. This flexibility empowers restaurants to use the capital however makes the most sense for their specific situation.

No Prepayment Penalties

MCA contracts don’t penalize restaurants for early payoff. So if a restaurant hits a profitable period and can pay back the MCA early, they end up saving money overall.

Potential Drawbacks to Consider

While MCAs provide clear benefits, restaurants should also weigh the potential downsides:

Very High Cost

The biggest issue with MCAs is their extremely high cost. The equivalent APR is usually between 60-200%, sometimes even higher. This is expensive compared to other financing options, so the funds should be used judiciously.

Daily Repayments

The daily deductions from credit card sales can be difficult to manage at times. Restaurants must budget properly to account for the consistent withdrawals. Slow periods may require dipping into cash reserves to cover payments.

Can Trap Restaurants in Debt Cycle

If restaurants rely too heavily on MCAs over an extended period, they risk entering a debt cycle. The high cost of MCAs make them difficult to pay off. Restaurants should have a plan to transition to lower cost financing options.

No Credit Score Improvement

Because MCA repayments aren’t reported to credit bureaus, they don’t help restaurants improve their credit. This limits future access to more affordable loans. Restaurants should work on credit alongside MCAs.

Confusing Contract Terms

The MCA contract terms like factor rates, payback calculations, fees, etc. can be confusing compared to simple interest rates. Restaurants should read contracts closely and get clarification on anything unclear before signing.

Tips for Getting the Best MCA

If an MCA makes sense, restaurants should follow these tips to get the best deal:

• Maintain high credit card volume – The higher the monthly volume, the lower the factor rate and fees you can qualify for.
• Have clean bank statements – Don’t bounce checks or overdraft. MCA providers want to see you handle money responsibly.
• Get quotes from multiple providers – Compare factor rates, fees, payback terms. Even small differences can save thousands.
• Only take what you need – Don’t take more than you can realistically pay back in 6-12 months.
• Use funds quickly – Put the capital to work ASAP so it starts generating returns to pay off the MCA.
• Make MCA provider top priority – Always pay them first before anything else when possible.
• Create financial plan – Budget carefully around the MCA deductions to avoid falling behind.
• Have an early payoff strategy – Strive to pay it off early; you’ll save significantly on total fees.

The Bottom Line

For restaurants that need quick capital and can’t secure traditional financing, a merchant cash advance can be an invaluable resource. The rapid access to funds enables restaurants to take advantage of time-sensitive opportunities and address problems quickly. But restaurants should also enter into an MCA cautiously – the high cost means it should be viewed as more of a short-term bridge to get over a hump rather than a long-term solution. As long as restaurants use MCAs strategically within the context of an overall growth plan, they can provide the spark restaurants need to take their business to the next level.