Eligibility criteria for merchant cash advances
Finding appropriate lending when you’re a small business can be a challenge. With many banks tightening up their borrowing requirements, it can be difficult to obtain the cash needed to grow a business successfully. With that in mind, many businesses will turn to alternative finance and MCA’s, and will want to fully grasp the various different eligibility criterias they’ll need to satisfy in order to be approved for a Merchant Cash Advance.
If you’re a business owner looking to raise finance, a merchant cash advance may be the perfect solution. In this type of lending arrangement, the loan is repaid through taking a percentage of the profits paid through debit and/or credit card terminal payments. This type of service is offered by a number of different lenders, each of whom have slightly different criteria for approving merchant cash advance borrowing. Detailed below are some of the factors which can affect eligibility
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- A key factor is the volume of transactions which pass through your card terminals – how many transactions do you process each month? Ideal candidates will be able to demonstrate they have a high volume of transactions from a large number of customers, minimising risk.
- The total amount of cash processed. When you opt for Capify merchant cash advance (MCA) borrowing, you’ll need to process £60,000 a year or £5,000 a month in card payments to be eligible.
- Turnover and profit: many lenders will expect you to turning a profit. As a guide, it’s common that the total value of the loan offered will be 25% or less of the total of your card transactions. In comparison, lenders like Capify can fund up to 150% of your monthly card transactions. For example, if the takings thorough your card terminal(s) are around £30,000 per month, we can advance you £45,000.
- Bank statements and/or Filed accounts: if you’re a sole trader or have just started your business, lenders will typically expect to see bank statements. When you’re the owner of a limited company, lenders will need to see a copy of your most recent accounts, as well as your current year’s accounts to date. If you haven’t already got one, a business bank account and the facility to produce balance sheets (these are financial summaries which list what you have (things or property (otherwise known as assets) and money (capital)) as well as what you owe (liabilities)) will both be helpful. Also make sure you have copies of any business and/or personal tax returns. If your company has only just started up, or doesn’t have any audited accounts, your personal tax returns may be used to help assess the level of borrowing risk your business may represent.
- Affordability: is the borrowing you want affordable? Can your business afford repayments of 10-20% of card takings? As a responsible lender, Capify (and most other reputable lenders) will want to be as sure as they can be that the repayments are affordable.
Amount you need and why you need it
Obviously the purpose of the loan is going to influence how likely it is that your application will be accepted. Lenders will be looking at:
- Loan amount vs. turnover: each lender has a standard ratio of turnover:borrowing. As indicated earlier, Capify will usually lend at a rate of 150% (ie: for every £1 of takings, you can borrow £1.50).
- Reason for funds and type of finance: approval could depend on the type of finance you’re applying for and the reason(s) that you need it. For example, if you want an asset finance loan, it can only be used to purchase an asset. In comparison, a general business loan can, in most instances, be used for any business purpose.
Your business/work history
- Trading history: lenders will want to see stable history, showing your experience and the length of time that you have been in business. Some lenders like Capify require you to have been trading for at least six months. Many other lenders require one to two years of trading history.
- Dept repayment history – this may include things such as defaults or county court judgments: personal credit history can be a factor if you’re a sole trader or partnership. This means that finance products such as a mortgage or credit cards play a role in lenders’ decision making. Similarly, if you have a poor credit history or historic debt problems, these can impact on the ability of your company to borrow, even if the company itself has no history of debt or financial problems.
- Business plan: if you want to borrow, you need a business plan! At its most basic, a business plan is a chance for you to think strategically about what you want the business to achieve and what steps you’re going to take to accomplish these goals. If you haven’t got a business plan, you need to write one! Look online for suitable templates, or access outside support to create a rigorous plan. In particular, indicate how you intend to manage risk in order to ensure business success.
Other eligibility factors
- Security/collateral and personal guarantees: some lenders might require a guarantor – this is an individual or company that promises to take over your repayments if your business is unable to continue to service the loan for any reason; some lenders will require that the loan is secured against a specific asset. An asset is a physical item that, if the loan is defaulted on, can be sold to repay the deficit. Typical business assets may include vehicles, machinery or property.
- Landlord references: obviously a business that’s on the verge of eviction is not in the secure trading position necessary to service a loan! If you’re currently in arrears with the rent or have other cause to suspect that your tenure is not as secure as you would wish, it may be worth sorting this out before applying for finance.
Steps to take in order to qualify for an MCA
Step 1: Identify the items or expenditure your loan needs to cover
One of the key MCA requirements is to be clear why you need finance. Ultimately, it should be the case that borrowing increases your bottom line, enhancing profitability. Be careful of borrowing to prop up a failing business: throwing good money after bad is a poor business strategy. You need to be confident that the financial benefit of the loan is going to outstrip the interest incurred through borrowing the money in the first place. Make sure you only borrow what you need.
Step 2: Work out how much your business needs
Whether you’ve worked out that you need new equipment, require additional supplies to cope with increasing demand (perhaps due to a delay in invoice payments), or are considering in investing in more cost-effective premises, you should borrow only what’s required to meet your objectives. Make sure that your proposed purchase is:
- Represents the best value possible.
- Going to generate additional income or save you money in the longer term.
Remember, never ask for a sum that’s greater than what you can afford to repay: borrow the minimum needed to achieve your goal and pay it back as soon as you can.
Step 3: Take a look at the credit records for you and your business
It’s important to remember that a poor credit report may not necessarily be down to imprudent borrowing or problems with repayment. In some cases, simply not having borrowed enough, or not being on the electoral register, can be enough to negatively impact on your credit score. If you have got a poor credit score, it may be worth trying to repair it before applying to borrow. Steps such as making sure that you have agreed repayment plans with your creditors (and are sticking to them), applying for small amounts of credit and making sure that these are promptly repaid or even taking out a mortgage could all improve your rating, making it more likely that you will be accepted for a loan in the future.
Step 4: Be realistic with lenders
Will a bank loan be right for you or would alternative finance be better? If you have a strong credit score and can take your pick of borrowing institutions, it makes sense to shop around for the best deal. Alternatively, if your profile isn’t ideal for lending, you may have less choice and need to accept a form of borrowing which charges more interest.
Step 5: Make sure you have all the documents you need
At the very least, a lender will want evidence that you’re who you say you are, as well as additional external documentation to show financial circumstances, tenancy status and similar information. Make sure that the paperwork you need to substantiate your application is readily available. Some businesses may find it helpful to obtain scanned copies of their important papers in advance of applying, in order to save time further down the line.
Step 6: Respond pro-actively to lender information
From making sure that you give a lender prompt answers to any queries they might have through to asking if there is anything you don’t understand, effective, two-way communication is essential to the smooth progression of your application.
When it comes to merchant cash eligibility, most lenders will lend no more than 10 – 20% of total turnover. In addition, one of the main MCA eligibility requirements relates to credit rating: if you (or your business) has a poor credit rating, it’s unlikely that you will be accepted for a loan. That said, the only way you’re going to know if you can borrow is to send in an application and see what happens! Take a look at Capify’s optimal borrowing solution, aimed at small and start-up businesses that need a cost-effective lending answer.
Capify offers a fast, effective lending solution. Their merchant cash advance requirements are generous compared with other providers: with up to 150% of the value of your merchant terminal transactions available to borrow, as well as straight-forward repayments methods, Capify is an attractive option for many businesses. If you’ve been trading more than six months, generate more than fifteen card terminal payments a month and are able to produce all the information needed for Capify to gain a clear idea of your financial situation, why not apply and see how much you could borrow to grow your business?