Businesses need capital to run from month-to-month and even day-to-day. Without capital, a business can't pay for inventory, labor, office or retail space, and more. Business cash advances can provide capital for businesses, but in most cases, the capital should be used to make money for the business rather than for regular monthly expenses.While in rare cases it makes sense to use a business cash advance for monthly cash flow needs (such as when waiting for a large payment or contract to be processed), it is usually necessary to use these cash advances to make more money for the business.
How Business Cash Advances Work
A business cash advance is a purchase of future credit card sales. The provider gives the business a percentage of its projected future sales up front, then takes a percentage of those sales each day until the amount, plus fees, is satisfied. For instance, if projected sales for a gift basket business are 20,000 per month, and they take a cash advance of 20% of that amount over 6 months, they would get $24,000 up front, then pay out a percentage of their gross receipts each day until the $24,000, plus fees, is paid.
Because of the fees paid, it doesn't benefit a business to take a business cash advance unless they can use it to make enough money to cover the fees, plus make a profit. Earnings that are level will not give the business enough cash flow to cover the fees paid; therefore, they will end up worse off after paying back the cash advance amount and fees.
Business Activities With Positive ROISome business activities are more likely to generate positive ROI (return on investment) than others. Here are some possible ways to use a business cash advance to make more money:
-Expand your retail space and add additional inventory (or add to your office space if you need to hire more sales staff, or add seats to your restaurant).
-Upgrade your equipment so that it can produce more or do more for the business in less time. Do this only if the increased efficiency will translate into more profit within a few months.
-Purchase additional inventory which can generate a profit within several months over and above the cash advance fee.
-Replace broken equipment without which your business can't generate income, if the profit is sufficient to cover the advance fee and still meet the business's needs.
Calculating the ROI of a Business Cash Advance
To calculate the ROI of a business cash advance, simply subtract the total profit you will make from investing the cash advance from the total amount of the cash advance, including the fee. You can calculate the total profit on a yearly basis, but keep in mind that the ROI may be much higher if the business continues to generate higher profits in future years as a result of the investment.
Quikstone Capital Solutions provides business cash advances to help businesses grow and increase their profits.
