Merchant Advance Capital for Startups and New Businesses

You have eight months of business under your belt now. Your coffee shop is picking up momentum, and customers are arriving regularly for their caffeine fix. Cash flow is also becoming constant for you now. There is just one hitch: you require $25,000 to purchase a second espresso machine and additional seating space and to employ a second barista to handle the morning crowd. You are now set for expansion but realize that your bank is not yet ready to lend to you.

“Come back to us when you have two years of financials,” they say. “We want to see solid revenue performance and substantial collateral.”

Even before you’ve managed to accumulate two years’ worth of statements, a competing business down the road could already have asserted the territory you are seeking to stake out. Welcome to the dilemma of the start-up entrepreneur, who requires growth capital but cannot get financing from the conventional bank until they’ve achieved growth on their own.

Merchant Advance Capital

The financial lifeline that looks at what you’re doing instead of what you haven’t done yet. But should this be an option for a newly-formed business? In this article, we will attempt to explain how merchant cash advances can be acquired by start-ups, what you'll need to be approved for these advances, and whether this rapid source of capital will be suitable for your own growth strategies.

Why are conventional financiers reluctant to fund startups?

It’s not that banks are mean; it’s just statistics. Approximately 20% of small businesses will go under in the first year, and about half won’t make it past five years. As far as a lender is concerned, taking out a loan for a brand-new business, which has no credit, is playing a dice game.

They are asking for tax returns over multiple years, good personal credit ratings, lots of collateral, a conservative business plan, and then they’ll probably still say no. The risk/reward equation isn’t worth it for banks and start-ups.

This leaves start-ups that are left in a sort of funding gap when the investment can greatly pay off.

How does merchant advances function for start-ups?

Merchant cash advances pose a different question compared to banks. “Will this business be in existence in five years?” is what banks want to know, whereas MCAs want to know, “Is this business processing credit card payments today?”

If you have been in business for a few months with consistent credit card sales, you might qualify for an MCA. The focus is not on how you’ve been doing in the past. The only history your credit card processing data has to offer the MCA company is the last three to six months.

This makes MCAs highly attractive to startups that have revenue streams but do not have extensive documentation. It is performance over pedigree.

Minimum requirements for eligibility for a startup MCA

Though MCAs are more accessible than traditional loans, you are expected to meet minimum marks for:

• Time in business: Three to six months of business is preferred by most providers. Brand-new businesses may not yet, but if you've been open since spring, it's likely fall, which puts you in the running.
• Credit Card Sales Volume: There must be a monthly credit card volume requirement that is usually set at minimum volumes ranging from $5,000 to $10,000 per month. However, there are some companies that will give advances on lower volumes but they usually have less attractive terms and advances.
• Business bank account: A running business account with regular deposits into it would be necessary. It should not be a personal account.
• Minimum credit scores: Less important than with bank lenders; however, most will require a personal minimum credit score of 500-550.

What's not needed, notice, is years of tax returns, financial statements, business plans, collateral, or good credit. The threshold of entry is very low.

Startup-specific advantages

MCAs offer several benefits to early-stage businesses over and above accessibility:

• Speed equals opportunity. Startups "surf" opportunities that move very quickly, new regions, suppliers offering discounts, virally driven demand. MCAs give you funding in days, rather than waiting months.
• Flexible payment during periods of growth: Startups have an unpredictable income flow. The payment will vary with the revenues generated.
• Collateral risk is not involved: If a person has fewer assets, they will not have to risk collateral in the form of their house or any of their personal belongings. MCAs are unsecured
• Securitization to traditional financing: Repayment of an MCA will also help the borrower build credit and eventually qualify for traditional financing terms.

The Startup-Specific Risks

The truth hurts: MCAs can be expensive, particularly for start-ups having fewer operating months. Rates for factor advances for new businesses can be higher, averaging 1.3 to 1.5 or higher, so you can expect to pay back $65,000 to $75,000 for an advance of $50,000.

But for a start-up, especially one that is not making much profit, the fee could be detrimental in the event that growth is not witnessed immediately. The daily hold for card transactions could also be problematic in the short run until you get the system right.

Whether Your Startup Needs an MCA

Ask yourself:

• Will this capital provide a return on investment above and beyond the cost? Well, if you are buying inventory with a price markup of 100%, yes. Otherwise, probably not.
• Are your sales of cards steady? If so, and you are bringing in 80% of your income from cards, an MCA might work for you. Or, if your business is cash or based on invoices of 30 days or less, keep shopping elsewhere.
• Are your business finances on the uptick? If your business is seeing gains each month or sustaining revenue levels, then a loan payment is probably within your means. However, if your business is experiencing slumps, then borrowing money will only worsen your financial situation because the other options that may be considered

Before entering into an MCA, one should look into the following:

• Personal investment/loans from friends and family: Cost effective but carries relationship risk.
• Small Business Administration microloans: Up to $50,000 with improved terms, but with a longer process. 
• Business credit cards: Require smaller amounts of capital with rewards and grace periods.
•  Crowdfunding/pre-sales: Give up shares/equipment for financing. 

Bottom line 

Merchant advance funding can be an excellent method for card revenue-starting businesses requiring quick access to funds for optimal growth opportunities. The process is very convenient and easy, but there are associated costs involved along with a repayment method that requires effective cash flow management. Leverage MCAs in areas offering a high ROI. A merchant cash advance should not be the solution for a failing business. With the right application, merchant cash advances can carry your start-up from promising to flourishing.