Merchant Cash Advance: How MCAs Can Help Hospitality Venues Weather The Economic Storm

There’s no denying that the hospitality industry has had it tough in recent years. From Covid lockdowns to staff shortages, rising inflation and reduced customer spending, many venues are struggling to stay afloat amid a tidal wave of financial uncertainty.

Unfortunately, hundreds of venues are predicted to close by the end of the year–a devastating prospect for many hospitality operators.

Unsurprisingly, many business owners are searching for additional funding to help keep their businesses afloat during these trying times. From traditional business loans to lines of credit, there are several options available to business owners. 

However, one form of financial assistance that often goes unnoticed is a merchant cash advance (MCA). But what is an MCA, how does it work, and could it help your business?

Let’s take a closer look.

• What challenges are hospitality businesses facing?
• What is a merchant cash advance?
• The difference between a merchant cash advance and a loan
• Why might your business need a merchant cash advance?
• The pros and cons of a merchant cash advance
• How to get a merchant cash advance
• How can Lightspeed Capital help your business?

What challenges are hospitality businesses facing?

Before we dive in to how merchant cash advances can help businesses, let’s take a step back to examine the current state of the industry and why businesses are struggling. 

There’s no denying that Australian families and businesses are struggling in the current economic climate, but you’d be hard-pressed to find an industry that’s had it tougher than hospitality.

According to data from our recent Hospitality Industry Report, the cost-of-living crisis and rising inflation have impacted 99% of hospitality venues. 

It was also recently reported that one in every 13 hospitality businesses is at risk of going bust. And it’s not just small or recently opened venues that are struggling. Big-name venues, like Lucky Kwong, fronted by renowned chef Kylie Kwong, have also been forced to close their doors due to the current economic climate.

Rising costs and reduced consumer spending

Hospitality venues are battling the cost of living crisis on two fronts. 

On the one hand, discretionary spending is down and, unfortunately, dinner out or ordering takeaway is often the first cut people make to save money. On the other hand, hospitality venues are facing similar issues to the rest of us–increased energy bills, soaring rent, interest rate hikes and exorbitant ingredient costs, making it unaffordable for many hospitality businesses to operate.

Renowned food journalist Dani Valent perfectly spotlights the dire situation for many venues.

“Profit margins have traditionally sat at around 10%. In 2021, only 19% of businesses hit that mark. Now, for many restaurants, breaking even is cause for celebration… One thing is certain: it has become far harder to run mid-range restaurants, and not all will survive.”

What is a merchant cash advance?

With an increasing number of hospitality venues facing financial uncertainty, many business owners are looking for ways to obtain extra funds to help them weather the current economic storm.

One form of financial assistance that often flies under the radar is a merchant cash advance. 

First things first, and to dispel a common misconception, a merchant cash advance is not a loan; it’s the purchase of future receivables. 

But what does this mean in real terms?

Essentially, a merchant cash advance is upfront working capital that’s provided to a business in exchange for future card sales. Businesses are given an advance on their future sales, which is then remitted through a percentage of the revenue generated by daily credit and debit card sales until the advance is fully remitted. 

This means a merchant does not owe any funds until they generate sales, which can be a huge relief for businesses currently struggling with their cash flow but are optimistic that things will turn around in the future.

The difference between a merchant cash advance and a loan

As we just touched on, a merchant cash advance is different from a traditional loan. 

Traditional loans involve borrowing a sum of money from a financial institution and repaying it with interest over an agreed-upon period of time. They involve comprehensive applications and collateral to help lenders mitigate risk. 

An MCA does not qualify as a loan because it’s a sale of future revenue. 

Because of that technicality, cash advances are not subjected to the scrutiny imposed on a standard small business loan. That means cash advances are a quick and easy way for merchants to acquire the cash flow they need rather than waiting for a bank’s rigorous and slow approval process. Nor does it require a traditional payment schedule, and your credit score plays no role in whether you qualify. 

Another interesting thing to note about an MCA is that it doesn’t impact your credit score. Similarly, you don’t need a glowing credit report to apply for an MCA. As a merchant cash advance isn’t a loan, you aren’t receiving any sort of credit, so your credit score remains untouched when you obtain an MCA. 

Why might your business need a merchant cash advance?

There are endless reasons why a business might need a merchant cash advance, and each one will depend on the individual business’s specific needs, goals, and finances. Typically, though, MCAs are ideal for businesses seeking short-term cash flow or who need quick access to funding for immediate business expenses.

There’s no one-size-fits-all approach as to why a business might want to apply for a cash advance, but here are a few common reasons why a hospitality business might consider an MCA.

Cash flow management

Restaurants often face cash flow challenges due to unpredictable consumer behaviour, an issue that has been exacerbated recently by the cost-of-living crisis. An MCA can help maintain cash flow stability, ensuring the restaurant can meet its financial obligations, such as paying suppliers and keeping up with rental payments or energy bills.

Seasonal fluctuations

It’s extremely common for restaurants to experience seasonal fluctuations in revenue. An MCA can help bridge the gap during slower periods by providing the cash needed to cover operating expenses, such as payroll and inventory.

Emergency repairs or maintenance

Unexpected equipment breakdowns or necessary maintenance (e.g., refrigerator repairs or plumbing issues) can disrupt operations. Emergency repairs can also cause unnecessary financial strain, especially if your business is already struggling with cash flow. Therefore, an MCA can provide the funds needed for quick repairs, minimising downtime and lost revenue.

Inventory purchases

To take advantage of bulk discounts or prepare for an anticipated busy season, a restaurant might need to purchase a large amount of inventory upfront. Or, it could be as simple as not having the current cash flow to meet inventory needs. In these situations, an MCA provides the necessary funds to stock up without disrupting operations.

Expansion or renovation

A restaurant might want to expand its seating area, update its décor, or renovate its kitchen to improve service and attract more customers. An MCA can supply the capital needed to undertake such projects without waiting for a traditional loan.

The pros and cons of a merchant cash advance

A merchant cash advance can be a useful financing tool for businesses in need of quick capital. Here’s a detailed look at the pros and cons, so you can explore if an MCA is the right choice for your business.

Advantages of a merchant cash advance

1. Fast access to cash

MCAs are typically approved and funded much faster than traditional loans, often within a few days. This speed can be crucial for businesses needing immediate cash to address urgent needs.

2. Flexible remittance 

Remittance is tied to daily credit card sales, so payments fluctuate with the business’s revenue. This means there are no fixed monthly payments, which can be beneficial during slower periods.

3. Doesn’t impact credit scores

Approval is often based on the volume of credit card transactions rather than credit score, making MCAs accessible to businesses with low credit or limited credit history.

4. No collateral required

MCAs are unsecured, meaning businesses don’t need to put up collateral to secure the advance, reducing the risk of losing assets.

5. No restriction on use 

With traditional loans, part of the application process can include submitting a business plan that details exactly how you’re going to use the funds for your business. However, funds from an MCA can be used for a variety of business needs, such as inventory, repairs, or marketing, offering flexibility in how the money is used.

Disadvantages of a merchant cash advance

1. Higher costs 

Despite a cash advance coming with a one-time cost or flat fee, these numbers can scare people away because they tend to be higher than the rates offered by traditional loans. If you’re considering choosing between a bank loan and MCA, translating the factor rate or flat fee into the loan equivalent–annual percentage rate (APR)–can help you compare costs. 

2. Daily remittance 

The requirement to remit a percentage of daily sales can strain cash flow, especially if sales are lower than expected. It’s important for every business considering an MCA to review their cash flow and any associated constraints related to daily withdrawals. 

3. Lack of regulation

MCAs are not regulated in the same way as traditional loans, which means less consumer protection for business owners. Unfortunately, some predatory providers take advantage of the fact that there is no regulation of the MCA industry. This is obviously a huge stressor for businesses who believe they have signed up for a legitimate service. That’s why it’s extremely important to do your research before applying. 

While MCAs offer quick and flexible access to funds, the high cost and impact on cash flow are significant considerations. Businesses should carefully evaluate their financial situation, potential revenue projections, and alternative financing options before deciding to pursue a merchant cash advance.

How to get a merchant cash advance 

One of the main benefits of a merchant cash advance is the speed at which you can receive funds. In other words, the process is quite simple. Here are the seven steps that you’ll usually have to follow when applying for an MCA.

1. Choose your MCA provider.
2. Complete an application.
3. Submit relevant documents, usually payment statements and several statements showing your business’s credit card transaction history.
4. Review your offer thoroughly. That includes the factor rate (the cost of the advance expressed in a decimal amount) or flat fee (a percentage of your cash advance added to the total amount to be remitted) and any other conditions.
5. Once you sign the agreement, the provider will typically carry out a quick underwriting process. 
6. When that’s done, you’ll be approved and receive the funding shortly after. 
7. The advance will be remitted automatically through your daily or weekly sales until it’s remitted in full.

How can Lightspeed Capital help your business?

Lightspeed’s merchant cash advance program, Lightspeed Capital, is available exclusively to eligible Lightspeed merchants.

In times of economic uncertainty, we firmly believe business owners should have better access to funding. Lightspeed Capital is here to support your business with a cash advance that can stabilise your cash flow and keep your restaurant running smoothly.

Unlike a traditional loan, you can use your cash advance on your own schedule for any business expense, and you can pay it as you go, only when you make sales.

Our process is simple: there’s no red tape or lengthy application, so you get your funds as quickly as possible.

With Lightspeed Capital, you can:

• Bulk up your cash flow for peace of mind
• Pay unexpected business bills and expenses
• Get business financing without the stress of credit checks
• Remit the cash advance only when you make sales

“It’s been a little Godsend”

Nick and Sharifa, owners of Rooster & Co., have used Lightspeed Capital twice to improve their cash flow and finance new projects. 

One of the things they loved the most about Lightspeed Capital was how easy it was to secure the cash advance, particularly compared to the long-winded process with many banks.

“When Lightspeed is responsible for [the cash advance]… they can see I’m taking a certain amount of money consistently for a very long period of time, so I don’t have to prove to Lightspeed: Hey, I’m good. Trust me, I’m making this much money… I don’t have to sit there and sell my firstborn just to get a small overdraft.”  

How Lightspeed Capital works

Here at Lightspeed, we want to ensure that the application process is quick and painless so that you can access funds as soon as possible. Our team pre-screens for eligibility and creates a cash advance offer that’s tailored to your business. If everything runs smoothly, you should have access to the funds after four simple steps.

1. Our Lightspeed Capital experts determine your eligibility. 
2. Your offer will appear in Back Office.
3. Request funding in the Financial Services section of your Back Office. 
4. Once approved, funds are sent to your bank account, and the balance is remitted through a percentage of your daily credit card sales.

If you’re already a Lightspeed customer, you can learn more about Lightspeed Capital here. If you’re not yet a Lightspeed customer, talk to an expert about our POS and Payments solution for businesses. 

Editor’s note: The content in this post is intended for informational purposes only and should not be considered legal, financial, or tax advice. We recommend consulting with a qualified legal or accounting professional for personalised guidance. Where available, we have included primary sources to support our information. We strive to ensure accuracy; however, we cannot be held liable for any actions taken based on this content. Please note that Lightspeed does not commit to updating or verifying any new changes to the information in this blog post after its publication.