Merchant Cash Advance for Startups: Everything You Need to Know

For startup businesses looking to secure capital, a merchant cash advance (MCA) may be an effective solution. MCAs provide businesses with cash upfront in return for a fixed share of future revenue. With an MCA, startups can access the funds they need without having to worry about the steep qualifying requirements that typically accompany traditional loans.

Key Points:

• Merchant cash advances allow startups to access capital quickly and without the long, traditional application process.
• MCAs are paid back through a percentage of credit card and/or debit card sales.
• Interest rates and fees for MCAs are generally much higher than for traditional loans.
• Startups should evaluate their business cash flow and read the fine print before taking out an MCA.

Understanding Merchant Cash Advances (MCA) for Startups

MCAs are a type of alternative funding for small businesses that provide access to much-needed cash in a more convenient and flexible manner than traditional financing. MCAs give businesses access to cash from advances based on their future credit and debit card sales. The repayment is automated, meaning it’s taken directly from the business’s credit card sales until the advance is fully paid back.

How Does an MCA Differ from a Traditional Loan?

Merchant cash advances differ from traditional lending in several ways, both positive and negative.  

• An MCA is not a loan. It’s a form of structured financing that doesn’t always require collateral or a credit check, making it a feasible option for small business owners or startups who may have difficulty obtaining traditional loans. 
• An MCA is a short-term form of financing. This means you’ll receive a lump sum of cash and then make payments based on a predetermined percentage of your daily, weekly, or monthly sales.
• The application and approval process for a merchant cash advance is much faster than that of a traditional loan. This means you can get the money you need much quicker, which is beneficial for those who need the cash immediately.

How Do Merchant Cash Advances Work?

At its most basic level, an MCA is an agreement between a business and a lender where the lender agrees to advance the business a certain sum of money upfront in exchange for a portion of the business’s future sales. The repayment agreement is structured so that the business can pay back the loan over time, usually with a percentage of the business’s daily or weekly sales, and makes it easier for a business to stay on top of payments without having to worry about a large lump sum repayment.

The repayment schedule will vary based on the lender, but will typically be a fixed percentage of the business’s daily or weekly sales that is automatically deducted from the business’s bank account until the loan is fully paid back. 

What Are The Typical Terms of a Merchant Cash Advance?

The terms of a merchant cash advance vary from lender to lender, but there are a few common elements that are typically included in the agreement.

• The repayment period of a merchant cash advance is usually very short. Typically, MCAs last four to 18 months—which means the entire loan must be paid back very quickly. 
• The repayment amount is determined by the business’s daily sales. This means there are no exact payment dates; instead, a small percentage of the business’s daily sales is taken until the loan is repaid in full. 
• Other terms of a merchant cash advance include a fee or upfront cost. This is typically taken out of the loan amount; a minimum daily repayment amount; and a holdback rate, which is the portion of the daily sales that is withheld by the lender to help ensure the repayment of the loan. 

Example of a Merchant Cash Advance for Startups

One example of a merchant cash advance for a startup might look like this:

• Loan amount: $100,000.
• Repayment term: 12 months.
• Payment structure: 20% of credit and debit card sales every day.
• Interest rate: 30% of the total loan amount.
• Costs: 3% upfront fee.

The terms of an MCA for a startup often vary by lender. The repayment rate, for example, may be calculated as a percentage of gross or net sales. The interest rate and any additional costs will also depend on the lender and the type of loan. Do your research and compare offers from multiple lenders before committing to an MCA. 

What Are the Requirements for a Merchant Cash Advance?

To qualify for an MCA, your business must meet certain criteria. Generally, businesses should have:

• A minimum of six months in business.
• $100,000 in annual revenue. 
• A three-month average of bank deposits to prove their creditworthiness. 
• A good track record of sales and/or a consistent payment history.
• A good cash flow and an established track record of depositing funds into the business bank.

The process is relatively straightforward and can provide businesses with the capital they need. As long as the borrower meets the criteria and has the necessary documents, the process should go smoothly.

Due to the time in business requirement, brand new startups with no history in business likely won’t qualify. That said, newer startups with a few months in business should still be able to qualify. 

How Can Funds from a Merchant Cash Advance Be Used?

Below are just some of the ways businesses can use the funds from a merchant cash advance:

• Growing the business by hiring additional staff, buying new equipment, or taking on new projects.
• Covering sudden expenses like unexpected bills or repairs.
• Financing expansions into new markets.
• Investing in marketing efforts like social media campaigns or billboard advertising.
• Purchasing inventory to meet increased demand.
• Helping with cash flow problems due to a slow payment cycle. 

What Type of Business is a Good Fit for a Merchant Cash Advance?

Choosing the right type of financing for a business is important. Make the wrong choice and you could end up getting into a cycle of debt your business can’t handle. Here are some of the types of businesses that are most suited for MCAs:

• Retail businesses that accept credit cards as a form of payment. 
• Food service businesses such as restaurants, delis, and food trucks.
• Businesses that need a quick influx of cash, such as those experiencing a seasonal rush or slow season. 
• Highly seasonal businesses that need a lump sum of cash in advance to cover their business expenses before they start turning a profit. 
• Home-based businesses that have a steady stream of sales and need working capital. 
• Franchises and business owners looking to expand their business.

Why Would a Startup Need a Merchant Cash Advance?

When a startup is first getting off the ground, it can be difficult to find capital to fund your operation. An MCA provides potential startup owners with the opportunity to obtain a cash advance to launch or expand their business without taking out a traditional loan.

MCAs are used in many different ways by startups. You can purchase essential equipment or supplies, hire additional staff, or even provide cash flow during slow periods. Additionally, they can be used to fund marketing campaigns, launch new products, or provide working capital to support everyday business operations. An MCA can also provide capital for growth opportunities such as expanding a business to another location or entering a new market.

Pros and Cons of Merchant Cash Advances for Startups

Pros of Merchant Cash Advances for Startups

• Easy to qualify. Merchant cash advances have generally low qualification requirements and can be easier to qualify for than traditional business loans since they’re based on sales volume instead of credit history. 
• No collateral needed. Merchant cash advances do not require collateral, which means your business or personal assets will not be at risk if you default on the loan. 
• Fast funding. Merchant cash advances are typically on a much faster timeline than typical business startup loans, meaning you could receive the cash you need more quickly. 

Cons of Merchant Cash Advances for Startups

• High costs. Merchant cash advances often come with higher interest rates and fees than typical business loans, which can make them more expensive for businesses.
• Repayment terms fluctuate. One of the major drawbacks of merchant cash advances is that the repayment terms can vary depending on your company’s credit card sales. This means your payments may fluctuate from month to month. For a business just starting out,  
• Limited uses. Merchant cash advances are typically short-term loans, which means they should only be used for short-term needs such as emergency repairs or a cash flow gap. They should not be used for long-term investments.

Is a Merchant Cash Advance Right for Your Startup?

When deciding if a merchant cash advance is the right choice for your startup, there are several factors you’ll want to consider. If your startup needs a quick infusion of cash and you don’t want to go through the long process of applying for a traditional loan, a merchant cash advance could provide you with a faster alternative. However, there are some downsides to merchant cash advances such as the high cost of fees and the fact that you may be required to disclose sensitive business information.

So, to fully decide if an MCA is right for your business, ask yourself a few questions:

• How quickly do you need cash?
• Are you willing to pay the hefty fees?
• Is your credit score good enough to secure other types of financing?
• Does your business make most of its money from credit and debit card sales?

How to Get a Merchant Cash Advance for Your Startup

Getting a merchant cash advance for your startup is easier than you think. Here's a comprehensive walk-through of what you need to know:

• Research your options. Start by researching and comparing some of the best merchant cash advance companies. Look for the ones that offer the best terms, low rates, and reputable customer service. Make sure you read all the fine print to be fully aware of the conditions.
• Make sure you qualify. After you've identified one or two potential providers, you'll need to check your eligibility. This can include a review of your credit score, business income, and other financial records. Each provider will have different criteria, so make sure you confirm yours.
• Complete the application. Once you're sure you’ll be approved, you'll need to complete the application process. This usually involves submitting business and financial documents, such as profit-and-loss statements, bank statements, and tax returns.
• Start the repayment process. Once you receive the MCA, you'll need to repay it on an agreed schedule. Typically, repayment will take place through automatic deductions from your credit card or bank account. You also have to stay on top of your payments, in order to avoid any late or missed payments.

Tips to Help Your Startup Make the Most out of a Merchant Cash Advance

The ability to access capital quickly and easily can be a critical tool for startups to take advantage of in order to grow their business. A merchant cash advance can provide exactly that, but make sure that you understand the terms of such a loan and make the most out of the opportunity. Here are some tips to help your startup make the most out of a merchant cash advance:

• Make sure you understand the terms of the loan and that you are comfortable with the repayment terms.  
• Utilize the funds for their intended purpose; use the money to grow and expand your business rather than for frivolous spending. 
• Make sure you keep track of all payments so you can stay on top of your repayment schedule. 
• Utilize the funds in a way that will generate more income than what you will owe on the merchant cash advance. 
• Consider the long-term implications of taking out a merchant cash advance and think about how it might affect your business in the future.

Merchant Cash Advance Alternatives for Startups

Merchant Cash Advances for Startups come with both advantages and disadvantages and not all businesses may qualify. Therefore, you must consider any other options that may be available to you. Here are some alternatives to consider:

• Business loans. A business loan offers a lump sum of funding that you pay back in equal installments over a set period of time. 
• Crowdfunding. Crowdfunding is an easy way to reach out to a larger audience in order to raise money for your startup. You can use sites like Kickstarter, Kiva, and Indiegogo. 
• Angel investors. Angel investors are high-net-worth individuals who may provide your startup with some capital in exchange for a portion of your profits. 
• Peer-to-peer lending. Peer-to-Peer lending is a way to borrow money from individuals rather than a traditional bank. You can work with companies like Prosper and Upstart which find investors to invest in your loan. 
• Grants. There are some government grants available for startups that meet specific criteria. 
• Equipment financing. Equipment financing is a type of loan specifically used to buy certain pieces of equipment for your business, so if you’re mainly looking to upgrade your equipment, these loans often come with more favorable terms. 

Useful Financing Resources for Startups

Startups looking for financing have a wealth of resources available to them designed to help them succeed. Here are a few organizations dedicated to helping startup owners get their businesses off the ground:

• The Small Business Administration. The U.S. Small Business Administration, with regional offices in every state and territory, offers counseling, funding, and access to other resources for small business owners. 
• Angel Investment Networks. Organizations such as the Angel Capital Association and the Angel Investment Network provide access to networks of accredited investors who provide seed capital. 
• Community Development Financial Institutions. CDFIs such as the Opportunity Finance Network offer financial services and resources to underserved entrepreneurs. 
• Business Development Organizations: Small Business Development Centers (SBDCs) and SCORE provide assistance to help businesses grow and succeed.

Final Word

Merchant cash advances can be a great funding option for startups to consider when they’re short on capital. They provide companies with access to capital by leveraging their future sales. However, startups should be mindful of the costs associated with merchant cash advances and make sure that they’re getting the best rate and terms available.

Startups should strive to pay off their merchant cash advance as soon as possible to help their business reach greater financial success. With the right research and preparation, a merchant cash advance can be a beneficial form of financing for startups that have been in business for a few months.