How To Start a Merchant Cash Advance Business

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How To Start A Merchant Cash Advance Business: Is $10,000+ Easy To Reach?

There are many ways to define business. For some, the act of buying and/ or selling of a business may seem simple. But business involves much more than that. You have to be an active part of the business’ success.

There are many issues that the owner will face in order to accomplish this. Solving these problems will allow the owner to see things they didn’t know.

Even if one has a business on a different scale, the concept of business is universal. Therefore, it is important to get to know the business before starting one. This could lead one to consider quitting.

It’s essential to have a bright outlook and at the same time, a profitable idea. After that, the next step is to find financing. However, this all depends on the wealth of each business owner.

There are many funding options if startup capital isn’t available. These range from loans to merchant cash advances to crowdfunding. 

The next step is to diversify the funds into every part of the business plan. This article will focus on merchant cash advance loans, the pros and disadvantages, and how these can be used to help an aspiring entrepreneur.

It’s going to talk about how to start a merchant cash advance business to see if it really is the best business model for you.

Towards the end of this article you’ll get answers for some of the most frequently asked questions on how to start a merchant cash advance business…

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Table of Contents

What Is Merchant Cash Advance?

Merchant cash advances are advances against future sales. This type is available to businesses that have regular credit card sales. The merchant cash advance is technically not a loan. 

The reason is that loans lend business owners money, and as a result, regular repayments of the principal and interest must be made. With merchant cash advances, however, the lender will provide cash upfront. 

The lender will then automatically deduct a predetermined percent of the daily credit and debit card sales along with an additional fee if the borrower has agreed to it from the beginning.

Merchant Cash Advance: A Merchant Cash Advance provider weighs credit criteria differently from bankers.

Merchant Cash Advance lenders may also accept cash via the Automated Clearing House, which allows the borrower to withdraw regular funds from their bank account. The lender will continue to take a cut of the borrower’s sales until all the advance has been repaid.

A merchant cash advance company or provider assesses risks and weighs credit criteria differently from bankers. To assess if the business can repay the money in the time claimed, a merchant cash advance provider will review the daily credit card receipts.

This basically means that a small company is selling a portion of future credit card sales in order to obtain capital immediately.

How A Merchant Cash Advance Works

The first step in the process is to reach an agreement with the merchant cash advance provider about the advance amount. The advance is then transferred to the account of the small business owners in exchange for a future share of credit card receipts. It could be daily or weekly.

A set percentage of the daily credit cards receipts will be withheld to pay the Merchant cash advance loans. This is also known as a “holdback” and this will keep going until the advance is paid fully.

Access to the merchant account allows the owner of the business to remove the collateral requirement needed for a traditional loan for small businesses (like a bank).

Because repayment is based on the daily merchants’ balance, businesses are able to repay the advance more quickly if they have made more credit card transactions. 

Also, transactions that are less than the daily balance in the merchant account will result in a lower draw. This means the business cash flow and daily cash flow will have a direct impact on the payback.

What Are The Benefits Of Merchant Cash Advances (MCA)?

Flexible And Scalable Finance

The percentage of revenue that a business makes is a factor in repayments. One will pay less if the business is doing well. However, if it is struggling, more will be required each month.

With the repayment type, there is greater assurance that bills are paid even if the borrower is going through the worst times – unlike the fixed payment finance which is not a good financing option for many companies.

Easy Repayments

Easy repayments are another perk of merchant cash advances loans. It’s somewhat less burdensome for the borrower. The reason for this is that the lender deals directly with the merchant cash advance loan provider, and not with a business account.

The percentage taken to repay the borrower is not in the company’s bank account. It is taken from another source. This is the same way most people pay income tax.

The payback money is automatically taken until the debt is paid. This is unlike other forms of finance. It’s a hands-off setup for the business owner, allowing the business to receive proper attention.

Although this all seems easy…there are so many legalities and formalities that have to be dealt with. A business like this can become quite the headache.

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Frees Up Other Forms Of Finance

MCAs offer the added benefit of opening a new credit line. This means obtaining additional financing for the business while simultaneously receiving a merchant cash loan is possible. This is a great option for many businesses.

A business owner, for example, can get a merchant cash loan for more cash flow, even if there is an existing equipment lease.

What Are The Downsides?

While MCAs offer many benefits, there are also some drawbacks. Most importantly, the amount of money a business owner can borrow will depend on how much the turnover is.

If the business owner is looking to borrow $600,000, for instance, but the monthly income is less than $10,000, it will be difficult to get that amount of financing since the cash flow position is not in line with the level of lending.

How To Start A Merchant Cash Advance Business

The paperwork involved will determine how long it takes to approve a merchant cash advance. It could take anywhere from hours to several days. The business owner will be able to see the funds in their account after the process has been approved.

Merchant cash advance approval is usually quicker than other types of business loans because it’s not as complex as the application process. Here are the steps that a business owner should follow:

  • Look for a funding company and apply.
  • Provide documentation to the MCA agent.
  • Get approved.
  • Have the credit card processing set up.
  • Review and finalize all details.
  • Obtain the funds.

These are the steps to follow to obtain a merchant cash advance loan to help get your business off the ground. Although the process is simple, the merchant cash advance rates can be significantly higher than other forms of financing. Rates also vary by small business funding provider. It is important to ensure that the ROI is positive before signing the document.

How To Qualify For Merchant Cash Advances

The easiest part about working with a merchant cash loan is the qualification. The applicant does not need to be a business owner for years to qualify for a merchant cash advance.

The credit card transactions, in terms of the amount and frequency, are more important than the business credit score. A business with bad credit can still qualify for a merchant cash advance if it has solid sales numbers.

Online applications are offered by most providers, which makes it even easier for business owners.

What You Need to Know About Merchant Cash Advances

Merchant Cash Advance Pros

  • Quick access to cash
  • Flexible terms or repayment
  • Does not require strong credit
  • Usage is up to the borrower.
  • Does not require collateral

Merchant cash advances offer fast cash access. This is their main benefit. Majority of the issuers can provide cash in as little as 48 to 72 hours.

Good new is this doesn’t require any sterling personal or business credit. Instead, emphasis is placed more on non-invoice sales and credit card numbers.

The cash can be used in any way the borrower wants, without restrictions from the issuer.

Providers often offer flexible repayment terms and business owners won’t be required to provide collateral.

Merchant Cash Advance Cons

  • Extremely expensive at 70%-200% APR
  • Cash flow is affected by minimum daily payments
  • It doesn’t build credit for business.
  • Merchant processor may be locked in.
  • Should accept credit cards

Merchant cash advances can come at a high cost. As much as 200% APR is potentially paid if there is a high factor rate. Even a low factor rate could result in about 35%.

MCAs are not bank loans and won’t report a borrower’s payment history on the business credit bureaus. This makes for an inefficient source of financing for startup businesses looking to improve their credit profile or build credit.

Merchant cash advances can quickly become a cash flow problem if they are not properly managed.

Is A Merchant Cash Advance Right For Your Business?

Merchant cash advances can be an effective way to quickly gain access to capital, but can also cause cash flow problems for businesses if not carefully managed.

There are many factors that make merchant cash advances appealing to businesses with poor credit scores. A lot of businesses use MCAs to supplement a cash flow crunch. A merchant cash advance can be used to fund a short-term opportunity that generates additional ROI, such as the purchase of inventory that is quickly turnaround.

Businesses that borrow to increase an ROI-generating activity are the most likely to be successful in leveraging MCAs. These businesses are also more aware of the costs and can understand the impact on the potential ROI. A merchant cash advance might be an option for you if that is the case.

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What Happens If You Default On A Merchant Cash Advance?

It is obvious that merchant cash advances are not subject to a default. As with many lenders, providers will include a personal warranty in their contracts allowing the business owner’s personal and business assets to be pursued to recover the advance.

MCA providers may not report your payment history regularly to the business credit agencies, but a default can be reported which can make it more difficult for businesses to obtain future financing.

Alternatives To Merchant Cash Advances

Merchant cash advances are one of the many options for small businesses with poor credit ratings. Other options include the following:

Option 1: Online Small Business Loan

Online lenders can offer short- and long term business loans to provide for the requirements of small businesses. There are many options available even if these small businesses don’t meet the criteria for an SBA loan.

Option 2: Business Cash Advance

In contrast to a merchant cash advance, this is based more on the borrower’s cash flow. The fixed payment is made every day or weekly by the lender. The business owner will probably get a lower interest rate than with the usual MCA.

Option 3: Factoring

Factoring is not a small-business loan. It involves selling the accounts receivables at a lower rate to immediately gain access to cash instead of waiting for customers to pay. However, factoring is an option to short-term capital, for as long as the customers pay by invoice.

Option 4: Accounts Receivable Financing

AR financing, unlike factoring, is secured by the business’ receivables.

Lenders will usually report payment history of a business to the appropriate credit bureaus. This means that the business credit score will have the chance to improve and thus have access to capital.

Final Verdict: Merchant Cash Advance

Be cautious! Merchant cash advances may be a viable option if the borrower is unable to qualify for any other financing due to less-than perfect credit. However, one needs to be careful and plan how the merchant cash advances will increase the business revenues more than the cost.

This should be considered a temporary solution. Be sure to calculate the MCA’s actual cost because the details involved can be complicated.

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