Starting a business is exciting, but it can also be daunting, especially when it comes to securing the necessary funds to get your idea off the ground. Traditional funding sources like bank loans can be time-consuming and difficult to qualify for, especially if you’re just starting out. This is where a Merchant Cash Advance (MCA) can be a game-changer for your startup.
A Merchant Cash Advance is an alternative form of financing that allows businesses to access working capital based on their future credit card sales or daily transactions. Unlike conventional loans, an MCA doesn’t require you to have a perfect credit score or collateral. It’s designed to help businesses with cash flow challenges, making it an appealing option for many small business owners and startups.
What Is a Merchant Cash Advance?
Before we dive into how to use an MCA to fund your startup, it’s important to understand exactly what it is. A Merchant Cash Advance is essentially a cash advance that is repaid through a percentage of your business’s daily credit card sales or debit card transactions. This means that repayment is tied to your sales volume, which can provide a level of flexibility when business is slow.
Unlike a traditional business loan, where you’re given a lump sum to repay over a fixed period of time, an MCA works by taking a percentage of your daily sales until the amount is paid off. The amount you’re required to pay back includes both the principal (the money you borrow) and the factor fee, which is essentially the lender’s profit for providing you with the funds.
Who Should Consider a Merchant Cash Advance?
An MCA can be a viable option for certain types of businesses, particularly those that deal with a lot of credit card transactions. If you’re running a restaurant, retail store, or e-commerce business, an MCA can be particularly useful since these industries typically see a lot of customer payments via credit or debit cards.
Here are some reasons why an MCA might make sense for your startup:
- You have steady credit card sales: If your business already processes credit card payments regularly, you may be eligible for an MCA.
- You need quick access to capital: Traditional loans can take weeks or even months to secure. An MCA can be approved and funded within days, making it perfect for businesses that need quick cash.
- You don’t have perfect credit: Many startups struggle to qualify for traditional loans because they haven’t built enough credit history. An MCA doesn’t rely heavily on your credit score, so even if your credit is less-than-perfect, you might still qualify.
- You need flexible repayment terms: Since repayments are tied to your daily sales, the amount you pay will vary based on how much money you bring in. This can give your business the breathing room it needs to manage cash flow during slow periods.
How Does a Merchant Cash Advance Work?
Now that we have a basic understanding of what an MCA is and who should consider it, let’s walk through how it works and how you can use one to fund your startup.
- Application Process
Applying for a Merchant Cash Advance is a relatively simple and quick process. Most lenders will require the following:- Proof of your business’s monthly sales (usually through credit card processing statements).
- Bank statements from your business account to verify cash flow.
- Identification documents (like a driver’s license or business registration).
- In some cases, a personal guarantee from the business owner.
The application process is less stringent than traditional loans because MCA lenders focus more on your business’s sales performance than your credit score. This makes it an ideal option for startups that may not have a long credit history or established financial track record.
- Approval and Funding
Once your application is submitted, the lender will evaluate your credit card sales history and determine how much money they’re willing to advance you. The amount you can borrow depends on your daily and monthly credit card processing volume. Typically, MCAs range from $5,000 to $500,000, though amounts vary based on your sales volume and the lender’s terms.
If approved, the funds are typically transferred to your business account within 1-3 business days, allowing you to access the capital quickly. This fast turnaround is one of the biggest benefits of using an MCA over other traditional funding options.
- Repayment Structure
The repayment of an MCA is tied to your daily credit card sales. A percentage of your daily sales (known as the holdback percentage) is deducted automatically to repay the advance. The holdback percentage can range from 5% to 20%, depending on your agreement with the lender.
Let’s say you agree to a holdback percentage of 10%. If your business generates $1,000 in credit card sales on a particular day, $100 would be automatically deducted and applied toward your repayment. On days when your sales are lower, your repayment will also be lower, which can provide some relief when business is slow.
- Factor Fee
It’s important to note that the factor fee (the amount you’ll pay above the original advance) will vary depending on the lender. Factor fees can range from 1.1 to 1.5, meaning you’ll end up repaying more than the amount you initially borrowed.
For example, if you receive a $20,000 advance with a factor fee of 1.3, you will ultimately pay back $26,000 (the $20,000 principal plus $6,000 in fees). While this higher repayment amount might seem daunting, the flexibility in repayment terms makes it a manageable option for many businesses, especially those that don’t have the assets or credit to qualify for a traditional loan.
Pros and Cons of Using a Merchant Cash Advance
Like any financing option, there are both advantages and disadvantages to using an MCA. Let’s break them down.
Pros:
- Quick access to capital: One of the biggest benefits is the speed. With traditional bank loans, it can take weeks or even months to receive funding. An MCA can be processed in just a few days.
- Flexible repayment terms: Since repayments are based on a percentage of daily sales, you only pay more when your sales are higher, which can make it easier to manage cash flow.
- No collateral required: Unlike traditional loans that may require you to pledge personal assets, an MCA is unsecured, making it a safer option for business owners who don’t want to risk their property.
- Easier qualification: If your business has consistent credit card sales, you’re more likely to qualify for an MCA, even if your credit score isn’t perfect.
Cons:
- High cost: The factor fee can make MCAs more expensive than traditional loans, especially if you take a long time to repay the advance.
- Daily repayments: Since repayments are deducted daily, it can be challenging for businesses with fluctuating sales to manage.
- Short repayment period: While flexible, the repayment period can still be relatively short compared to a traditional loan, which could create cash flow challenges for your business in the long term.
When Should You Use an MCA for Your Startup?
A Merchant Cash Advance is best suited for startups that:
- Have a steady flow of credit card sales.
- Need immediate funding for things like inventory purchases, equipment, or covering operating costs.
- Don’t have access to traditional bank loans due to poor credit or lack of collateral.
- Can handle the higher repayment costs associated with the factor fee.
If your startup falls into these categories, an MCA could be the perfect solution for quickly boosting your cash flow and helping you scale your business.
Final Thoughts
While a Merchant Cash Advance can be a great way to fund your startup quickly and without requiring perfect credit, it’s essential to carefully consider the costs and repayment structure. MCAs can provide the liquidity you need to keep your business running during tough times, but they come with a higher price tag than traditional financing.
Before moving forward with an MCA, make sure to evaluate your business’s cash flow, credit card sales volume, and ability to repay the loan. By doing your due diligence, you can decide if an MCA is the right choice to help your startup grow and succeed.