A Merchant Cash Advance business, also sometimes called an MCA, is a funding option you can choose if you’re looking to start a business. Merchant cash advance businesses began gaining popularity in 2005 and it has just continued to grow ever since.
If you’re looking to start a merchant cash advance business but aren’t sure where to begin, you’ve come to the right place. We’ll explain everything you need to know to start a merchant cash advance business.
What is a Merchant Cash Advance?
A merchant cash advance, also called an MCA, is a type of loan that you can take out when starting a business.
Like an advance on your paycheck for cash ahead of time in exchange for the work you will perform, merchant cash advances function similarly. A business that applies for a merchant cash advance uses its future credit card sales to repay the lump sum that was borrowed. Because it is essentially a loan, you have to apply for an MCA and your approval is based upon your credit score and rate of credit card transactions.
There are also different terms and stipulations for repayment that you will have to agree to when you are approved for a merchant cash advance.
What are the Benefits of a Merchant Cash Advance Business?
Approval and Lump Sum Speed
Hands down, the speed at which you can receive your funds is the number one benefit of a merchant cash advance business. You can receive funds for your business in as little as just a few hours from the time that you submit the application. This is a great reason to apply for a merchant cash advance for your business, especially if you require money fast.
Bad Credit or No Credit is OK
Another benefit of a merchant cash advance business is that lenders typically do not require a good credit score for approval. Businesses can have bad credit or no credit and still get approved for a merchant cash advance.
Flexible Payment Amounts
The monthly payment amount of a merchant cash advance is flexible which can be a huge benefit for businesses. Typical loans have fixed monthly payment amounts that may be difficult to repay in months when you have a low cash flow which can cause a strain on your business during those months. Merchant cash advances have flexible monthly payment amounts that are determined based on the percentage of your credit card sales. So if you have a slow month, you have a lower payment amount.
No Collateral Requirement
Many typical bank loans require collateral as part of the application process so that they can take possession of the property if you fail to make your monthly payments, but that’s not required with merchant cash advances which takes much of the pressure off of repaying the loan.
Are there any Downsides to Merchant Cash Advance Loans?
There are a couple of considerations you need to take when applying for a merchant cash advance business. These aren’t reasons that should keep you from starting a merchant cash advance business, but they are factors you should take into consideration when you apply.
Expensive Repayment Amounts
The overall monthly payment for the merchant cash advance loan may be small, but the overall total repayment amount can be substantially higher than a traditional loan. Again, this shouldn’t be enough to change your mind about applying for a merchant cash advance loan, but it’s something you need to consider.
No Regulations for MCA Loans
Because MCA loans aren’t traditional loans, they don’t have traditional loan characteristics, like fixed interest rates. This means the MCA lender can set the repayment percentage rate at whatever number they want. However, you will have to agree to the percentage amount, so you do get a little say-so as to whether or not you agree to the terms of the loan before it is finalized.
How to Start a Merchant Cash Advance Business?
1. Apply for Funding
The first step to starting your business with a merchant cash advance is to apply for funding. The lender will review your application and check your credit score to determine if you meet the requirements for approval.
Because a merchant cash advance is a loan, the lender will have to review your application which can take a few days, so keep this in mind when you are waiting for approval. The good news is that most lenders who offer MCA’s know that speed is essential, so you can be approved within just a few hours with the right lender.
Your application will likely require the following information:
- Business name
- Business address
- Requested loan amount $
- Contact information (phone number, email address)
- Monthly credit card transactions
- Business start date
- Business owner’s name, address, and social security number
- Business owner’s percentage of ownership of the business
2. Gather Documents to Provide the MCA Agent
Part of the application process will require you to provide various documents to the MCA agent. The MCA agent may require you to provide the following documents, so make sure you have them available and ready to submit when asked:
- Daily credit card transactions/receipts
- Length of business history
- Monthly deposit report
- Business tax ID number
- Business tax returns
One thing that is important to know is that your business may not have a credit report that it can provide the MCA agent. Your business will only have a credit report if it has a business credit card or previously established loans.
The MCA agent may contact you if there is no established credit history for your business. You will likely need to provide additional financial documents like monthly sales reports and credit card transaction information.
3. Review the Terms of the Merchant Cash Advance
Once approved, the lump sum of the advance will be deposited into your account and you will have repayment terms that you will have to follow each month. The terms of the repayment will be determined by your credit score and daily credit card transactions.
4. Understand the Holdback, Payback, and Advance Amounts
Three components make up the merchant cash advance: the holdback amount, payback amount, and advance amount.
The holdback amount listed on the terms of the merchant cash advance is the percentage of the daily credit card receipts that are withheld so that you can pay the loan back. You will have to agree to this amount when you review the terms of the merchant cash advance, so make sure you understand how much will be taken from your credit card transactions each day.
The payback amount is the total amount that the business must pay back to the lender. This includes any fees that the lender has included in the agreement.
The advance amount is the total lump sum that you receive from the advance.
Final Thoughts
A merchant cash advance is a great way to start your business, especially if your business is new or you need fast cash. For more articles about starting a business, check out our articles for how to start a laundromat business and how to start a firewood business in 5 steps.
