It is a monumental task to get a new business off the ground. Most entrepreneurs who have succeeded will tell you that turning an idea into a thriving business requires a high level of dedication and focus - but it can be done. Many start-ups attempt to launch on a shoestring budget and make themselves more attractive to investors through hard graft and workarounds, but others require start-up funding from the outset to take flight and build towards growth. Merchant cash advances are becoming an increasingly popular alternative funding option for small businesses, but unfortunately, it will be very difficult to find a company that offers a merchant cash advance for startups. There are business start-up loan options, but in any case, it is clear that business finance and investment will be necessary at some point in the life of a small business.
- The challenge for start-ups
- So are there no credit checks with merchant cash advances?
- So how does a merchant cash advance work?
- So, what options are there for start-ups?
- The bottom line
The challenge for start-ups
The biggest barrier to small business funding for start-ups is a lack of sales history. There are banks that will fund start-ups, but loans can be hard to come by. This is the case with the merchant cash advance, because it is largely based on a company’s record of sales through card transactions. At Capify, for example, we require you to have been trading for a minimum of six months and will determine the size of an advance based on the monthly takings via card payments (the minimum monthly revenue must be £5,000). This is how we differentiate the merchant cash advance from conventional business loans, which usually revolve entirely around a credit check.
So are there no credit checks with merchant cash advances?
A company providing a merchant cash advance will perform a credit check as one component of the decision-making process. This is a requirement of responsible lenders, to safeguard consumers from placing themselves in devastating financial turmoil, and Capify is committed to being a responsible lender. However, the primary consideration when assessing eligibility for a merchant cash advance is business performance.
Again, with start-ups, this is next to impossible to determine, and that is why the MCA isn’t generally available to them, but if you have been trading for six months or more, we can assess your business performance and make a decision. Credit checks are a factor, but they are just one part of the broader picture.
So how does a merchant cash advance work?
At Capify, we’ve been in the business of giving merchant cash advances to small businesses for over 10 years – we are confident no-one knows the product better than us. As previously stated, every application is considered with a holistic view of business performance to assess how much you could afford to pay back. Repayment schedules are usually short-term, falling between six and 18 months for the most part.
The cost of this type of loan is usually higher than more conventional loans because repayments aren’t made with APR. The cost of obtaining this finance is the ‘factor rate’, which usually falls between 1.2 and 1.5. This means that for every £1 you receive from the advance, you repay £1.20 to £1.50 (sometimes more). Repayments are made as a percentage of our credit/debit card takings, so you only make repayments when you are earning.
So, what options are there for start-ups?
If a start-up loan is not an option for you, there are still options for funding that you can consider. Here are some practical suggestions:
- Crowdfunding: This has become a popular way for people to raise money for all manner of causes. You’ll need to make your start-up stand out from the competition who are looking to get money from investors. You will also have to ensure there is a reward in it for your investors, such as a VIP invitation to your launch party.
- Pension-led funding: This means you’re essentially lending to yourself. Entrepreneurs can take from their pension pot to invest cash in their new start-up. It can be a risky move, but if you believe in your start-up then it could yield substantial dividends in the long term.
- Grants: These can come from private or educational institutions or even the government itself. Grants are a sum of money awarded to a business that you does not need to be paid back. These are ultimately awarded to different business in order to help with the businesses on going developmenet and growth.
The bottom line
Obtaining finance to fund your start-up is just one of the many challenges entrepreneurs face. Operating on a shoestring at first is good advice if it can be done, but otherwise, you will need to work hard and get creative to receive the funding you need. There is no start-up merchant cash advance, so you will need to wait until you have been in business for a certain amount of time before you can consider this as an option. At Capify, we require you to have over six months of trading history and a monthly card payment turnover of more than £5,000 to qualify. When you are at this point, a merchant cash advance can be a great option to get the capital you need to invest in your future.
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