Complete Guide to Business / Merchant Cash Advance for Startup Companies

Written by
Marissa Saini
Last Modified on
December 19, 2023

Business Cash Advance, also known as Merchant Cash Advance (MCA), could be the right funding option if your business is looking for fast and flexible funding. A business cash advance for startups is NOT a loan. Basically, a financing company advances you cash in exchange for your future credit card sales, plus additional fee.

How Business Cash Advance or Merchant Cash Advance for Startup Companies Works?

How Business Cash Advance or Merchant Cash Advance (MCA)works

Cash Advance is considered to be one of the simpler way to get quick source of business fundings

A business cash advance is usually for businesses whose primary revenue stream are from debit and credit card sales. Such businesses and usually retail shops or restaurants. As compared to traditional loans, cash advance is usually has a hassle-free application. Moreover, quick approval process with flexible credit requirements that will better suit most small businesses.

In our previous article, we've covered more details on why businesses need a merchant cash advance.

The financing company (your lender) will purchase a part of your future/prospective sales from your credit card. Your lender will then examine your business' credit card records to decide if you will be able to repay through your daily sales from your credit card. Basically, it is a lender and borrower agreement, based on a couple of factors such as the advance amount and the repayment amount.

5 Benefits of a Business Cash Advance or Merchant Cash Advance for Startup Companies:

1. Easy Online Application

Applying for a business cash advance is quick and easy. Most applications can be done online by providing the supporting documents of your business, such as your Business ID and recent bank statements.The process shouldn’t take long to complete, and most providers will respond within 48 hours. Such a convenient and speedy process lets you stay focused on your business, while still having the opportunity to receive funds.

2. Access to Funds in 24 hours

5 Benefits of a Business Cash Advance for Startup Companies

Once your application is approved, you can receive your funds within a few days. Some lenders, like Aspire, will give out your funds within 24 hours of approval. Collecting your funds in short amount of time enable you to start putting money back into your business and improve cash flow.Some possible ways to utilise your newly acquired funds could be to make a craft new advertising campaigns to reach more customers, payroll, or purchase the latest equipment to improve business efficiency.

3. Flexible Credit Score

Unlike most business loans where a strong personal and business credit score is essential, it relies more on the consistency of your credit card sales. Additionally, the ratio of how long you have been in business to how much other debt you may be carrying or your past payment history.Due to that reason, it won't help you build your credit score since most providers don't report them to the credit bureaus.

4. No Collateral Required

5 Benefits of a Merchant Cash Advance for Startup Companies

Collateral here refers to the bank's insurance policy if you could not pay what you have borrowed. It is common for you to provide some form of collateral (such as assets) when applying for a business loan for security reasons.On the contrary, business cash advances are unsecured. Meaning it doesn't require you to provide any personal or business assets to obtain your funds.

5. Flexible Repayment System

Business cash advance offers more flexibility since payments are based on your credit card sales. In the event where your sales are low, you pay less and the same thing applies the other way around.Small business loans that have a fixed interest rate can be helpful for budgeting your expenses, but it can be a problem when you undergo a slow month and could not make the regular payment.

With a business cash advance, your payments are proportionate to what the business brings in.

3 Disadvantages of a Business Cash Advance or Merchant Cash Advance for Startup Companies

Disadvantages of merchant cash advance for startup companies

1. Costly

It can get relatively pricy. In fact, it is considered to be one of the costliest forms of financing.Business cash advance companies determine the amount you must repay by applying a factor (or multiplier) to the amount of funding. The factor is often in the range of 1.09 to 1.50. For example, if you finance $10,000 and the finance company applies a factor of 1.25, you must repay $12,500 ($10,000 x 1.25) during the term of the loan.Feel free to get a free credit assessment from Aspire to see your cash advance plan. There's no hidden fee and withdraw only if you're agreeable to the terms.

2. Short-term Solution

It is not a long-term solution, it varies from 3 months to 15 months. This short time span is one reason of to why it's costly. You should only consider it if it can solve your financial problem and you're sure that you can generate revenues to repay the financing (on top of interest fee). Otherwise, using a cash advance could become counter-productive.

3. Risky

Finally, how a business cash advance works, is by selling your future sales. This can be a problem as it might be unpredictable. Though this risk applies to any type of loan or financing services, it might be a concern for your business as business cash advance as there's a higher costs and shorter repayment periods.Read here on our advice - Advice from a fintech startup: Don't borrow if you only want to stay afloat.

Which Startup Companies Qualify for Business Cash Advance or Merchant Cash Advance?

1. Majority of Payments Via Credit Card

For example, if you own a restaurant or a retail store, a huge portion of your revenue is through credit card payments. You can use a business cash advance as a short-term financing tool to solve your short-term cash and term problem. This will come in handy for business inventory purchases, debt payments, unexpected payments, and more.

2. Small Businesses without Collateral

If you have little or no collateral and/or a low credit rating, this could be a solution to your financing problems. Providers tend to have easy eligibility standards, so most small businesses shouldn’t have a problem qualifying.

3. Seasonal Businesses

If you're running a seasonal business, this can be beneficial since paying off a smaller sum during lull periods will help ease the strain on your cash flow. ie. Winter Apparel

Seasonal businesses are those that normally sells during a certain period of the year

4 Alternative Fundings to Business Cash Advance for Startups

Alternatives to business cash advance

1. Short-term Business Loan

A short-term loan is a good alternative to a business cash advance because it has a more affordable lump sum financing arrangement with greater transparency and fixed repayment terms. You will know exactly the amount of repayment you will need to pay during each month. Unlike business cash advance, you won't have to make daily payments.

2. Private Investment Loan

This loans are provided by investors or non-bank institutional lenders looking for a return on their money by offering debt financing to growing small businesses. They usually provide longer terms and affordability of a private business loan, making it a good alternative to a business cash advance.

3. Invoice Factoring

If your company has a number of unpaid invoices from another business, you could sell invoices to obtain access to immediate cash. In fact, with invoice factoring, you could get funded for an invoice in as little as 24 hours too. The speed of funding makes and affordability of factoring makes is a good alternative to a business cash advance.

4. Small business line of credit

A business line of credit, also known as revolving credit, provides borrowers with access to a sum amount of capital. It operates much like a credit card. You will get approved for a maximum amount of borrowing limit, which you can then draw anytime according to your business needs. You will only pay interest on the amount borrowed. After you repay, you can reuse your credit line over again, that is why it is called the "revolving credit".

Aspire Business Line of Credit

At Aspire, we envision a world where business owners have fast and simple access to the funding they need to grow. That’s why we’re on a mission to re-invent banking for SMEs across Southeast Asia. Our current product provides SME and startup owners in Singapore with financial flexibility through a line of credit of up to S$300k. Which, can also be used to make business payments to enjoy 60 days free credit terms. With no monthly fees or obligations to withdraw, you only pay interest on the amount you end up using. Opening an account is free and can be done online!

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Frequently Asked Questions

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About the author
Marissa Saini
is a seasoned writer and an avid trendspotter across business finance, personal finance, travel and lifestyle industries. With writing history at SingSaver, INK, and ohmyhome, Marissa leverages her broad range of experiences to simplify finance and make readers financially savvy.
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