How to start a business with a cash advance

22 Oct 2020

Raising enough capital to purchase inventory and kickstart operations is one of the biggest challenges new business owners face. Established businesses can also face cash flow problems, for instance during seasonal dips or in times of economic uncertainty — such as the one we all find ourselves in today. Fortunately, there are a few business finance options out there that may be able to help.

Merchant cash advance

Business funding can provide you with the support you need when starting a new business. However, strict criteria and inflexibility means it can be difficult to obtain finance from traditional lenders, especially if your business hasn’t been trading for very long. 

What is a business cash advance?

Business cash advances enable SMEs to use future revenue as collateral for finance. 

Crucially, cash advances allow you to access the capital you require at speed. There are different cash advance options and the most common is called a merchant cash advance. It’s sometimes referred to as a revenue loan or revenue-based financing. 

In some ways, a cash advance works like a traditional loan in that you get the money at the start of the loan term and pay interest for the as long as it’s owed. As such, the cost will depend on how quickly you plan on repaying it. 

A cash advance effectively sells future sales to the lender at a discount.

You and the lender agree on a total cost upfront and this doesn’t change, however as repayments come from your business’ revenue in a proportional way, you’ll be paying back more when your business earns more (and vice versa). So, instead of a monthly interest calculation, there’s a set amount you need to get to.

One of the main benefits of cash advances is that they’re a flexible option. Think about it: instead of having to pay a set amount — even when times are economically tough — what you pay back aligns with how much you sell on a month-by-month basis. 

What is a merchant cash advance?

A merchant cash advance is designed for merchants — companies that receive customer payments via card machine. Technology makes it easy for merchant cash advance loans to be facilitated because the lender can work with your payments provider.

The amount you’re advanced will be calculated based on your average monthly turnover, so you’ll have to provide evidence of your last few months of card sales. For this very reason, a merchant cash advance may not be a viable option for startups that are yet to trade.

Every card transaction automatically repays part of the merchant cash advance, so you don’t have to plan for monthly repayments. So that you can keep track of what you’ve paid back, the lender will usually give you access to an online portal where you can get access to the relevant information.

merchant cash advance

Merchant cash advance example:

1. Your business borrows £14,500 with a fixed fee of £3,000, so you have to pay back £17,500 in total 

2. Based on your average monthly turnover, you agree to repay 10% from your card transactions every month 

3. You receive £15,000 per month from your card machine transactions, so you repay £1,500 a month 

4. You’ll have paid off the merchant cash advance loan in 12 months 

Can I start a business with a merchant cash advance?

It is often easier to qualify for a business cash advance loan, especially compared with business loans from traditional lenders like high street banks. Cash advances are especially suited to businesses that make money but don’t have large sums of working capital or assets, as well as those requiring funding quickly. 

Depending on the lender and approval process, it’s possible to receive the funds within 24 hours.

A merchant cash advance may also be a viable option for businesses that haven’t been established for very long, however because a merchant cash advance is based on future revenue that is estimated on your company’s sales records from card transitions, you won’t be able to get one if you’re starting from scratch. 

They can be easier to obtain than traditional business loans (where lenders will expect you to have been trading for a year or more), but many merchant cash advance lenders will still expect you to have been trading for at least 6 months. 

Because of its simple approval process, business cash advance loans are ideal for business owners who need business financing quickly. And since you repay the loan from your future revenue, you can qualify for a business cash advance even if you have a low personal credit score, no collateral, or haven’t been in business for very long.

You can use your cash advance for any business purpose, including paying bills, buying inventory or for payroll. 

Business finance for new startups

If you’re in the process of setting up a business and require capital to get it off the ground in the first instance, there are a few options out there. It might be worth looking into the government’s Start Up Loans scheme, crowdfunding, pension-led funding, short-term loans, business grants, angel investment — there are numerous routes you can pursue.

Invoice financing — a similar type of business funding

Invoice financing isn’t a type of cash advance finance per se, however there are similarities. It’s a funding option that operates by selling accounts receivable in the form of unpaid invoices to the lender at a discount (this particular form is called ‘invoice discounting).

Essentially, if you have to wait too long for customers to pay you what they owe, you can obtain the majority of the money for the lender within a couple of days, then the remaining amount (minus lender fees) once they finally pay up. It’s a particularly popular option for those operating in industries with lengthy payment terms such as construction. 

As with merchant cash advances, invoice finance can help boost cash flow and provide a degree of financial certainty for small-to-medium sized businesses.

Whether you’re just starting out or have been trading for a few years now, find out business finance your business could be eligible for today.

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