Building a new business from scratch is not an easy venture to take on, and today’s atmosphere certainly works against most small businesses. CEO of Next Street Marina Linhart said, “There is an $87 billion gap in financing for small businesses.”
What exactly does that mean? Simple: If your business is new, then you’re a lot less likely to find even moderate capital investments. It’s like when a new author goes to publish a first book, but can’t find an agent who accepts authors who haven’t been published, and can’t find a publisher that accepts authors who don’t have an agent. New businesses operate the same way. You need to prove yourself before you find an investor, but there’s no way to do build the business without one.
That might sound like a problem, because it is. Restaurant owners, in particular, can expect lower sales without those initial investments. That means fewer employees and a barely operating skeleton crew.
Many restaurant owners opt for a merchant cash advance, or MCA agreement, to make ends meet. These contracts can be great for restaurant owners who are going places. But they can also be a nightmare for those who were already doomed from the beginning.
Business owners who are considering an MCA agreement need a solid plan before signing one. Is there an open demographic interested in what they’re selling? Is the business’s location easily accessible? How will new customers find out about the business? How will the business continue to grow in the long-term? Business owners who cannot answer these simple questions should quit while they’re ahead.
For those who have built a solid foundation with proper planning, it’s doubly important to take only as much as needed. Interest rates will be higher in an MCA agreement, and many states still don’t regulate these lending practices. Until regulations are put into place, it’s up to the business owner to weed out the predatory lenders from those who are actually on their side.
Restaurants stand to benefit more than many other businesses because profits can fluctuate day-to-day even when the weather changes. That’s okay, because merchant cash advances generally operate by taking a percentage of the profit each day instead of using a set payment amount.
The advance can usually be obtained within 48 hours, with a low credit rating, and without risking assets or worsening an already low credit rating — as long as the business owner was careful not to put up collateral before signing the agreement. When the business grows significantly, an owner can move on to a more traditional investment strategy.