Starting a business is an exciting venture, but it comes with challenges, particularly when it comes to securing funding. While traditional loans may not always be the right fit for new businesses, a merchant cash advance (MCA) can be a potential solution. In this blog, we will explore whether merchant cash advances are suitable for startups and how Purple Tree Funding can help you decide if this option is right for your business.
What Is a Merchant Cash Advance?
A merchant cash advance is a type of financing where a business receives a lump sum of money in exchange for a percentage of future credit card and debit card sales. Instead of fixed monthly payments, repayments are made based on a percentage of daily sales. This type of financing is often considered when traditional loans are not an option, especially for businesses with inconsistent revenue streams.
How Does a Merchant Cash Advance Work?
When you take out an MCA, you receive an upfront lump sum that is repaid through a percentage of your daily credit and debit card sales. The repayment amount fluctuates with your sales: when sales are high, you pay more; when sales are low, you pay less. This makes MCAs flexible compared to traditional loans, which require fixed monthly payments.
1. Eligibility for a Merchant Cash Advance
To qualify for a merchant cash advance, businesses typically need to meet certain criteria, such as having a minimum amount of monthly credit card sales (usually $5,000 or more). Lenders will also consider your business’s history, industry, and financial health. While credit score is a factor, it is not as crucial as it would be for a traditional loan.
2. Repayment Process
Repayments for an MCA are deducted daily from your credit card sales until the full amount is paid off. This structure means there are no fixed monthly payments, and your payments will vary depending on how well your business is doing.
Are Merchant Cash Advances Suitable for Startups?
Merchant cash advances can be a quick solution for businesses that need capital, but they may not be the best fit for every startup. Let’s take a look at the pros and cons of using an MCA for a new business.
1. Advantages of Merchant Cash Advances for Startups
For startups, an MCA can provide several benefits:
Quick Access to Capital
Unlike traditional loans that can take weeks to be approved, an MCA can be processed and funded within days. This is especially important for startups that need fast access to cash to seize opportunities or cover short-term expenses.
No Collateral Required
Unlike many traditional loans that require collateral (such as property or equipment), MCAs are unsecured, meaning your business does not need to put up assets as security. This can be an advantage for startups that don’t have valuable collateral.
Flexible Repayments
The repayment structure of an MCA is tied to your business’s sales, meaning repayments are based on how much money your business is making. This flexibility can be helpful for startups with fluctuating sales or seasonal revenue patterns.
2. Disadvantages of Merchant Cash Advances for Startups
However, there are also some disadvantages to consider:
High Costs
Merchant cash advances typically come with higher interest rates than traditional loans. These high costs can make them an expensive option for startups, especially if they’re not generating consistent sales. It’s important to carefully calculate the total cost of the loan before proceeding.
Daily Repayments
Repaying an MCA daily can be a challenge for startups with unpredictable cash flow. If your sales are low for one month, the daily repayments can still be a strain on your business. While this model offers flexibility, it can also add stress if your business is struggling.
Potential for Debt Cycle
Because of the high costs and quick repayment structure, there is a risk that a startup may take out another MCA to cover previous debt. This cycle of borrowing and repayment can lead to a financial strain and even insolvency if not managed properly.
When Should Startups Consider a Merchant Cash Advance?
A merchant cash advance might be right for your startup in certain situations. Here are a few examples when an MCA could be a good option:
1. When You Need Quick Funding
If your startup requires quick access to cash, an MCA can be processed much faster than traditional loans. This can help cover immediate expenses, inventory purchases, or other business needs.
2. When You Have Steady Credit Card Sales
If your startup has consistent credit card sales, an MCA might work well for you. Since repayments are tied to sales, businesses with steady sales will have an easier time repaying the loan.
3. When Traditional Financing Isn’t an Option
Startups with limited credit history or no assets for collateral may find it difficult to qualify for traditional bank loans. In these cases, an MCA may be a good alternative, as it doesn’t require collateral or a perfect credit score.
How Purple Tree Funding Can Help Startups With Merchant Cash Advances
At Purple Tree Funding, we understand that securing funding for a startup can be challenging. That’s why we offer merchant cash advances as one of the funding options for businesses that need capital quickly. Our team can help you navigate the MCA process, explain the terms, and ensure you fully understand the repayment structure before you commit. We are dedicated to finding the best financing solutions for your startup, whether you’re looking for an MCA or another funding option.
Conclusion
Merchant cash advances can be a viable option for startups in need of fast funding and flexible repayment terms. However, they come with high costs and daily repayments, which may not be suitable for all businesses. It’s essential to carefully assess your startup’s financial health and needs before choosing an MCA. At Purple Tree Funding, we can guide you through the process and help determine if an MCA is the right choice for your business.
