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As an auto repair shop owner, you want to make-cost effective choices for your business. That includes those times when you need to borrow extra working capital. Perhaps you’ve heard that merchant cash advance is not a good idea. And in many instances, it should not be your first choice. But there are times when merchant cash advance can be a cost-effective tool to grow your auto repair shop.So don’t automatically discount it. Let’s look at the facts.

It is important to understand how merchant cash advance, or MCA, works. It is also important to be clear on how much money you need, and why. That way, you can predict the financial effect it will have on your business. Then you can decide if an MCA is your best option.

WHAT IT ENTAILS

Merchant cash advance is not a loan. With a traditional business loan, you borrow money and repay it over time. You pay interest on the amount you borrowed. With an MCA, you are selling future credit and debit card sales revenue. You get your cash up front, just like a loan. Instead of interest, you agree to repay more than you’re borrowing. For example, you might borrow $50,000 and agree to repay a total of $58,000. The extra $8,000 is the lender’s profit for taking a risk on your small business.

You do not make monthly payments with an MCA. Instead, a fixed percentage is taken from your credit card transactions until you have repaid the full amount. That percentage is transferred automatically to the lender. You don’t have to write checks or deal with paperwork.

So merchant cash advance is a very simple process. It can be a cost-effective option for any small business that accepts credit cards. That includes service businesses such as your auto repair shop. MCA is also popular with retailers and restaurant owners. The more credit card business you do, the more you can borrow through a cash advance.

BENEFITS OF MERCHANT CASH ADVANCE

Like all small business loans, an MCA helps grow your business. It can gives you working capital when you need it most. But like all types of financing, you have to use it wisely.

Many small businesses aren’t eligible for traditional bank loans. You haven’t been in business long enough. Or your revenue isn’t high enough. Or you don’t have collateral. With an MCA, you don’t need collateral, or a personal guarantee. Time in business isn’t necessarily a consideration – as long as you’ve been open at least six months. That’s why approval rates for merchant cash advance are very high.

Often, the main barrier to small business loans is bad credit. A merchant lender doesn’t care about your credit history. They want to see your credit card sales history. And predicted future sales. That’s what they’re banking on.

A merchant cash advance is fast. You can be approved and get your money within a few days. When you need money quickly, this is a critical benefit. You can fix a problem or secure a new opportunity without missing a beat.

You can borrow a small amount, say somewhere between $5,000 and $50,000. That’s too little for a bank loan.

Repayment is always affordable. Fixed monthly loan payments can be a hardship if your income fluctuates.  MCA payments are a fixed percentage instead. If you have a lot of credit card sales, the payment is higher. If sales are low, so is your payment. If something terrible happens (remember Superstorm Sandy?) and you’re out of business temporarily, payments stop during that time.

BUT, ON THE FLIP SIDE . . .

The price of a cash advance is high. You have to consider the total repayment amount plus any fees, etc. you must pay. The equivalent interest rate could be 80% or more. Be very clear about potential fees and other charges.

Repayment may be easy, but will it cause a new cash crunch? An MCA will pull as much as 15% off the top of your credit card sales. That doesn’t seem like much. And it may be very doable. Just be sure the money you retain is enough to operate your auto repair shop.

Merchant lenders are not regulated. They aren’t subject to lending laws. So there are some unscrupulous players in the field. Be careful to check references and compare offers before you make a decision.

HOW WILL YOU USE THE MONEY?

There are lots of ways to spur business growth:

  • Add an extra mechanic or technician to meet increasing demand
  • Expand inventory
  • Purchase new equipment or tools or supplies
  • Expand or upgrade your facility
  • Marketing – a new local sponsorship opportunity that will increase your visibility. Or a campaign to reach out to a new audience segment. One auto repair shop owner used social media to target women, with amazing success.

AN MCA CAN BE A LIFE-SAVER IN AN EMERGENCY OR SLUMP, TOO

Get the money you need right away. Handle the problem, and get on with growing your shop. You’ll have peace of mind, because you know you can repay comfortably.

SO WHEN IS MERCHANT CASH ADVANCE COST-EFFECTIVE?

  • When you don’t have time to wait for a traditional business loan.
  • When you don’t have other options. As I already noted, small business loans may not be an option for you. That said, other types of unsecured business loans may not work for you, either.
  • When you have bad credit.
  • When you do have predictable credit and debit card transactions.

Remember, an MCA won’t be cost-effective if you borrow more than you need right now. But it can be a good financing tool if it helps your business grow, by:

  • Getting past a trouble spot
  • Taking advantage of a new opportunity

Industry experts say business is booming for auto repair shops. The most effective auto repair business loans will help your business boom. Attract new customers, build up inventory, or physically expand to serve more customers. Using the money to increase revenue will give you the highest return on your investment. That’s the definition of cost-effective.

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