Are There Restrictions on How A Merchant Cash Advance Can Be Used? [Complete with Usage Scenarios]

Posted: September 12, 2019
Category: Uncategorized

Generally, merchant cash advances are restricted in the sense that they must be used to grow your business, but that’s all. You can’t receive a merchant cash advance from a reputable provider and use the funds to buy your me-ma’s 70th birthday gift, or that new home you’ve been eyeing. But the application of merchant cash advances is quite broad. Let’s look at a few possible scenarios on how a merchant cash advance can be used to take your business to the next level.

Interested in learning more about merchant cash advances? Check out our related article: What Is A Small Business Merchant Cash Advance?


Jayne’s Diner Wants to Expand

Let’s assume that Jayne’s Diner, a thriving establishment on Manhattan’s Upper East Side, is looking to expand. Having been in business for one year, it doesn’t have the historical financial documents necessary to obtain a loan. Jayne’s Diner is profitable, always packed – you just can’t get a seat there, especially during lunch and on the weekends, and has established notable roots within the Upper East Side community. Jayne, owner of Jayne’s Diner, would like to expand the diner by leasing a vacant storefront next door and transforming it into an extended dining area.

After meeting with the building manager, Jayne learns that if she signs a lease within the next 7 days, Jayne’s diner would be eligible for 2 free months, which would be a huge help as she will have to renovate the storefront to match the diner’s brand as well as purchase additional tables, chairs, etc… Upon reviewing her finances, Jayne determines that the diner doesn’t qualify for a loan, but she needs additional capital.

Jayne performs research and applies for a merchant cash advance the next day. Jayne provides all the information necessary and is provided with an advance of $150,000 the next day. She immediately uses her merchant cash advance to lease the storefront next door and purchase tables and chairs.


Tom’s Trucking Must Pay Bills

Tom Trucker, owner of Tom’s Trucking, has recently determined that he wants to apply for a merchant cash advance to pay past due bills. Tom’s has always paid its bills on time, but Tom was sick for a few months not too long ago and this set the company back quite a bit. Tom’s is, for the most part, a healthy business. It has three big rigs on the road 322 days throughout the year and is run by both Tom and his wife, Mary.

Tom applies for a merchant cash advance and is provided with $55,000 in funding within a few days. He quickly uses $20,000 to pay past due bills and the remaining $35,000 to purchase an additional big rig for the company. He believes the return on investment that he’ll see with the fourth big rig will not only enable him to pay the advance back on time, but also have money left over each day. Tom used the funds he received from the merchant cash advance in a manner that he thought would best serve his company.


Mary’s Muffins

Mary’s Muffins is a tiny hole-in-the-wall muffin shop located in Boise, ID. Before opening Mary’s Muffins, Mary became somewhat of a local celebrity when she baked muffins for her daughter’s PTA school charity event. Buying into the hype, Mary opened a little muffin shop and it has thrived ever since. Mary’s at the stage where she’s plateaued and needs to expand her operations if she wants to make it big time. Mary sets out to have Mary’s Muffins in the frozen dessert section of Grocer Gate, the local chain of grocers.

Although Mary’s Muffins has money in the bank and Mary has some savings stashed away, she’d prefer not to deplete the business of most of its funds or dip into her personal accounts. She planned on taking a week or so to perform research and consider her options but is so inspired while in the frozen dessert section of Grocer Gate later that evening, she immediately goes online and searches for a way to acquire the necessary funds.

She determines that the loan process is too lengthy but comes across an article discussing merchant cash advances. Unsure of whether a merchant cash advance is for her and the basic legitimacy of this alternative source of funding, Mary continues performing research until she feels comfortable applying for one. She completes her application, her information is verified, and she’s funded within two business days.


Merchant Cash Advances Offer Opportunities

Merchant cash advances provide you with the ability to both sustain your current business operations or engage in new ones. Whether you’re looking to pay your bills, like Tom, expand your current operations, like Jayne, or enter a new space entirely, like Mary, the working capital provided from receiving a merchant cash advance can help you take that next step. Another benefit of the merchant cash advance source of funding is that you are selling a percentage of your future receivables, not equity in your business. By selling a percentage of your future receivables and not an ownership stake in your business, you both remain in control of your business and can profit more in the long-term than you would if you sold an equity stake.


Next Steps

Before deciding on whether a merchant cash advance is appropriate for your business, you should perform as much research as possible. Make sure you truly understand what a merchant cash advance is, how it works, and what each funder both offers and requires. It’s critical that you spend the time necessary familiarizing yourself before taking the next step and applying. Additionally, be sure to read each contract and seek clarification before signing and receiving funds.