Merchant cash advance for startups

Jade Tremblay
Jade Tremblay
Two images are shown: a man checking his tablet, and the same man smiling while looking down.

There are many reasons why, as a startup business founder, you might turn to merchant cash advance (MCA) providers for funding. They offer a straightforward and immediate answer to your cash flow problems, especially if you’re looking for a short term solution with few barriers to entry. But before you start researching where and how to apply for a merchant cash advance, it’s best to figure out whether it’s the right funding choice for your startup

What are the pros of a merchant cash advance for startups? 

Merchant cash advance companies can offer a number of advantages to small businesses encountering issues with cash flow during the early stages of business. Let’s take a closer look at why these advances can be a great option for startups

They’re easy to apply for 

The MCA application process is simple, quick, and straightforward. Most merchant cash advance lenders allow you to apply entirely online by uploading all the necessary supporting documentation through their website. Depending on how long it takes you to complete the application, an MCA can take anywhere from a few hours to a few days to be processed. 

Once a business owner has been approved for an MCA, they can receive their funds in as little as two days.

Most cash advance applications for startups involve a form requesting the following information:

  • Loan amount
  • Company name
  • SSN/SIN
  • Company contact information, including address, number, and email
  • Annual gross revenue
  • Monthly credit card volume
  • Business history, including number of years in business
  • Tax ID for your business

You may also need to upload some supporting documentation, including: 

  • Business ID
  • Credit report
  • Financial (bank) statements
  • Recent credit card processing statements
  • Recent business tax returns
  • Proof of citizenship

You don’t need perfect credit 

A big reason why founders turn to merchant cash advances in the first place is because they have trouble securing more traditional loans requiring a credit check. Whether due to bad credit or a lack of credit history, small business owners who are unable to secure funding through banks often look to merchant cash advance companies as a suitable alternative. Most lenders do not require perfect credit. That being said, they will likely require you to meet a minimum credit score (usually between 500 and 600) in order to qualify for an MCA.

One requirement of many MCAs is a business credit score. If your company doesn't have a business credit card, however, the lender will instead look at any existing loans and/or whether your business has applied for financing in the past. 

Payments are flexible 

Unlike a traditional bank loan, in which you’re locked into a fixed payment plan, merchant cash advance payments are proportional to the amount of business you bring in each month. This can be especially beneficial to startups, as payments are reduced during slower months in which credit card revenue was lower—allowing them to stay afloat as they work to secure additional working capital

You don’t have to put up any collateral

If you’re worried about personal liability, a merchant cash advance could be a wise choice to fund your startup. Unlike other means of financing, your company assets are not at risk should you default on the payments. This is because there is no collateral requirement for MCAs, unlike invoice financing, for example. 

Speedy approvals and release of funds

You’re unlikely to come across a business applying for a loan that isn’t in need of the funding as soon as possible. Unlike traditional bank loans that have lengthy application processes and take longer to allocate financing, MCAs have comparatively faster approval rates and subsequent release of funds. As mentioned earlier, many lending firms guarantee a decision within a day or two. When you’re in a cash flow emergency, this quick turnaround can be a lifesaver for your business.

What are some of the cons of merchant cash advance for startups?

Merchant cash advances, while boasting the advantages listed above, also come with a fair share of disadvantages. For that reason, they’re not always the best funding option for your business. We’ve listed a few reasons why an MCA isn’t for everyone. 

Merchant cash advances aren’t regulated

Unlike highly regulated banks and lending firms, merchant cash advance providers aren’t bound by legal restrictions. For that reason, some MCA contracts charge extremely high interest rates and tack on unreasonable repayment terms—capitalizing on potentially desperate business owners.

They’re more expensive than traditional loans

Compared to other financial products, MCAs are comparatively more expensive. While business loan rates generally range from 6.25% and 12%, merchant cash advance rates can fall anywhere from 5% to 20%. In fact, the annual percentage rate (APR) for an MCA fee can be as much as 200%. 

Your business operations could be limited

As with almost everything in life, there will always be a small subset of the population that tries to cheat the system. Merchant cash advance companies need to protect themselves against founders who have received a merchant cash advance but then encourage their customers to pay by cash. After all, no funds are held if the business doesn’t receive any credit card payments!

To protect against this, most lenders place limitations on how you operate your business as it relates to credit card payments. Some contracts prohibit you from discouraging customers to pay by credit card and offering special discounts for cash payments. Certain contracts may even prohibit business owners from switching credit card processing companies during the repayment period. 

Is a merchant cash advance right for my startup? 

Merchant cash advances are a quick and straightforward solution to meet your immediate funding needs. And while they can be more expensive than some of the other small business funding options out there, their speed and convenience can mitigate the potential opportunity cost of traditional business financing.

Before you jump to apply for an MCA, take the time to carefully consider alternative financing options, including crowdfunding (and peer-to-peer lending) and private equity and angel investors, among many others.

  • Recent credit card processing statements
  • Recent business tax returns
  • Proof of citizenship

You don’t need perfect credit 

A big reason why founders turn to merchant cash advances in the first place is because they have trouble securing more traditional loans requiring a credit check. Whether due to bad credit or a lack of credit history, small business owners who are unable to secure funding through banks often look to merchant cash advance companies as a suitable alternative. Most lenders do not require perfect credit. That being said, they will likely require you to meet a minimum credit score (usually between 500 and 600) in order to qualify for an MCA. 

One requirement of many MCAs is a business credit score. If your company doesn't have a business credit card, however, the lender will instead look at any existing loans and/or whether your business has applied for financing in the past. 

Payments are flexible 

Unlike a traditional bank loan, in which you’re locked into a fixed payment plan, merchant cash advance payments are proportional to the amount of business you bring in each month. This can be especially beneficial to startups, as payments are reduced during slower months in which credit card revenue was lower—allowing them to stay afloat as they work to secure additional working capital

You don’t have to put up any collateral

If you’re worried about personal liability, a merchant cash advance could be a wise choice to fund your startup. Unlike other means of financing, your company assets are not at risk should you default on the payments. This is because there is no collateral requirement for MCAs, unlike invoice financing, for example. 

Speedy approvals and release of funds

You’re unlikely to come across a business applying for a loan that isn’t in need of the funding as soon as possible. Unlike traditional bank loans that have lengthy application processes and take longer to allocate financing, MCAs have comparatively quicker approval rates and subsequent release of funds. As mentioned earlier, many lending firms guarantee a decision within a day or two. When you’re in a cash flow emergency, this quick turnaround can be a lifesaver for your business.

What are some of the cons of merchant cash advance for startups?

Merchant cash advances, while boasting the advantages listed above, also come with a fair share of disadvantages. For that reason, they’re not always the best funding option for your business. We’ve listed a few reasons why an MCA isn’t for everyone. 

Merchant cash advances aren’t regulated

Unlike highly regulated banks and lending firms, merchant cash advance providers aren’t bound by legal restrictions. For that reason, some MCA contracts charge extremely high interest rates and tack on unreasonable repayment terms—capitalizing on potentially desperate business owners.

They’re more expensive than traditional loans

Compared to other financial products, MCAs are comparatively more expensive. While business loan rates generally range from 6.25% and 12%, merchant cash advance retrieval rates can fall anywhere from 5% to 20%. In fact, the annual percentage rate (APR) for an MCA fee can be as much as 200%. 

Your business operations could be limited

As with almost everything in life, there will always be a small subset of the population that tries to cheat the system. Merchant cash advance companies need to protect themselves against founders who have received a merchant cash advance but then encourage their customers to pay by cash. After all, no funds are held if the business doesn’t receive any credit card payments! 

To protect against this, most lenders place limitations on how you operate your business as it relates to credit card payments. Some contracts prohibit you from discouraging customers to pay by credit card and offering special discounts for cash payments. Certain contracts may even prohibit business owners from switching credit card processing companies during the repayment period. 

Is a merchant cash advance right for my startup? 

Merchant cash advances are a quick and straightforward solution to meet your immediate funding needs. And while they can be more expensive than some of the other small business funding options out there, their speed and convenience can mitigate the potential opportunity cost of traditional business financing.

Before you jump to apply for an MCA, take the time to carefully consider alternative financing options, including crowdfunding (and peer-to-peer lending) and private equity and angel investors, among many others.

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