Merchant Cash Advances (MCA) can be helpful in acquiring capital quickly for some small business owners, who find it tough to raise capital through traditional methods. But the ease of raising MCA capital can bring with it the burden of cash flow. Since MCA payment is normally made on a daily or weekly basis, it can directly affect the amount of money left to run the business.
This is one reason why you should really know the break-even point of your business. The break-even point will tell you how much revenue your business will need to earn to cover all the expenses and debt service.
Should the MCA payments begin having a huge effect on your expenses, the required revenue needed to remain financially safe will rise greatly.
What Is the Break-Even Point of a Business?
A business is at its break-even point when the income from the business is able to cover all the expenses of the firm. At the break-even point of the firm, the firm is not experiencing any profit and losses. If a firm has an expense of $30,000 per month, and the firm earns $30,000 in total after subtracting the variable costs, then the firm has achieved its break-even point.
Let us now add $10,000 to the monthly payment of MCA. The firm must now earn more in order to cater to the $10,000 payment. The break-even point of the firm has changed. This is one of the reasons why MCA financing may impact a company significantly, despite its strong sales figures.
How MCA Payments Change Your Break-Even Point
MCA payments become the extra cost burden for the firm. Assume that the business earns a total of $100,000 per month as its revenues. After subtracting the cost of inventories, salaries, rentals, and other operational expenses, the total balance left is $20,000.
Now, if the firm has a MCA payment of $12,000, then there will only be $8,000 left with the firm. Even though the firm is earning $100,000, its financial situation has changed drastically now.
This is particularly important because an MCA payment does not exist in isolation. However, the business owner still needs to pay salaries, suppliers, landlords, insurance companies, taxes, and other vendors. In the event that too much of the revenue comes in committed towards debt payments, then the business will very fast find itself under a cash-flow squeeze.
Revenue Is Not the Same as Available Cash
One of the major misconceptions that business owners have about their business is the idea that the more revenue they make, the healthier their business must be. Not necessarily. For example, a business might be making $100,000 every month from sales, but still struggling to make ends meet due to the fact that most of the revenue is already committed to expenses and debts.
Take the case of a business that makes $100,000 every month from sales. If $65,000 is committed to operating expenses and another $15,000 goes to MCA payments, the business has $20,000 left before taking into account other needs.
The next month the sales drops to $80,000 and the situation becomes worse. While operating expenses can drop, rent, insurance, payroll and debt payments will not change much. This leads to something referred to as a cash-flow squeeze.
The business is still generating revenue, but there is less and less cash available to absorb unexpected expenses or invest in growth.
Why MCA Payments Can Become Especially Difficult During Slow Periods
Every business experiences fluctuations in revenue. Some businesses have seasonal sales cycles, while others may experience slower periods because of changes in consumer demand, market conditions, or unexpected disruptions.
An MCA obligation can become particularly difficult during these periods. Imagine a company that normally generates $120,000 per month. Its MCA repayment is $15,000 per month.
If sales fall by 25%, revenue drops to $90,000. The MCA obligation may still require substantial payments, even though the business now has significantly less revenue coming in.
The business owner may then have to choose between making debt payments and paying for essential operating expenses.
This is where an MCA can begin affecting more than just the company's finances. It can affect staffing, inventory, supplier relationships, marketing, and the owner's ability to make strategic decisions.
A Simple Example of MCA Payments and Break-Even
Consider a business with $50,000 in monthly operating costs before debt payments. The business also has a $10,000 monthly MCA obligation. That means the company needs to generate enough cash to cover at least $60,000 in expenses. But the calculation becomes more complicated if some expenses increase as sales increase.
For example, if approximately 30% of revenue goes toward variable costs, the business keeps about 70 cents from every dollar of sales to contribute toward fixed expenses and debt.
In this simplified scenario, the business would need roughly $85,700 in monthly revenue to generate enough contribution to cover $60,000 in fixed obligations. The exact break-even number will vary from business to business, but the principle is important. The larger the debt payment, the more revenue your business may need to generate before it reaches break-even.
What Happens When a Business Has Multiple MCAs?
The situation can become even more challenging when a business has more than one MCA. For example, a business may have one MCA requiring $6,000 per month and another requiring $5,000. Add another $2,000 in payments from credit cards or other business financing, and the company's total debt obligations could reach $13,000 per month.
Individually, each payment may appear manageable. Together, they can consume a significant portion of the company's available cash flow.
This practice of taking additional financing while existing obligations remain outstanding is sometimes referred to as MCA stacking. When multiple repayment obligations are being deducted from the same revenue stream, the business can have considerably less money available for normal operations.
At that point, taking on another advance simply to cover existing obligations may make the underlying problem worse rather than solving it.
Warning Signs That Your MCA Payments Are Creating Cash-Flow Problems
One of the clearest warning signs is when your business is generating revenue but your bank balance continues to decline.
Another warning sign is relying on credit cards, personal funds, or additional financing to make existing debt payments. If you regularly have to move money around just to ensure that automatic withdrawals go through, your current debt structure may be putting too much pressure on your business.
Business owners should also pay attention when payroll or vendor payments become difficult, when there is no money left for unexpected expenses, or when increasing sales does not seem to improve the company's financial position.
These situations do not necessarily mean that the business is failing. They may indicate that the company's debt obligations and cash flow are no longer properly aligned.
What Can a Business Owner Do?
The first thing to do is figure out where the money goes. Compare your average monthly income with your operating costs and the sum of all your repayments. It is not enough to think about individual MCAs; you need to take into account all of your debts as a whole.
After that, it will be easier for you to decide whether your payment plan is sustainable or not.
If your repayments eat up a lot of your money, it may be useful to explore the possibility of alternative ways of handling the problem. These may include debt restructuring, communication with creditors, rethinking the payment plans, and consulting professional debt relief.
A debt relief company can help business owners analyze their debt situation and communicate with creditors if necessary. In some circumstances, professional assistance may also involve exploring settlement or restructuring strategies.
There is no guarantee that a creditor will agree to a particular arrangement, and the right approach depends on the business's financial circumstances and the agreements involved.
Don't Wait Until Cash Flow Becomes a Crisis
One of the biggest mistakes a business owner can make is waiting until the company's bank account is nearly empty before addressing its debt.
With restricted cash flow comes reduced possibilities. The company may already be late on payroll, accounts payable, taxes, or other necessary bills. A deeper analysis of your breakeven point can help you spot the problem while it is still in the manageable stage.
If you need a lot of additional income just to meet your current obligations, the problem could very well lie elsewhere than your sales figures. The problem could be the amount of cash being consumed by debt payments.
Final Thoughts
An MCA can provide important working capital, but the repayment obligation needs to be evaluated alongside the rest of your business finances.
A business can have strong sales and still struggle if a large percentage of its revenue is being used to repay debt. When MCA payments take up too much of the available cash flow, they can increase the revenue required to reach break-even and leave the business with less room to handle unexpected expenses or slower sales periods. That is why business owners should look beyond revenue alone.
Know your expenses. Know your debt obligations. Know your break-even point. Most importantly, know how much cash your business actually has available to operate.
If MCA payments are making it difficult to maintain healthy cash flow, speaking with a qualified debt-relief professional may help you understand your options and determine what steps could make your debt obligations more manageable.
