Our world revolves around money, so it stings all the more when there’s a shortage of it. That’s when a merchant cash advance (MCA) business can swoop in to save the day by providing much-needed financing to help businesses through rough patches.
If you like the idea of helping people out of a jam, or helping entrepreneurs achieve their dreams, an MCA business might be a great fit for you. You’ll provide short-term loans to qualified businesses and receive payments through their future sales.
This step-by-step guide will show you exactly how to set up your own merchant cash advance firm, from examining the industry to registering your business and considering the most useful digital tools and services.
Step 1: Decide if the Business is Right for You
Before you start your merchant cash advance business, you need to become familiar with what the industry is about.
Pros and cons
Let’s dive into the pros and cons so that you can gain a balanced understanding of the business.
Steady demand, as almost everybody needs cash at some point
Simple, highly profitable business model
Partner with small financial firm to expand services
Greater interest rate flexibility than other lenders
Easy repayment systems mean minimal work
High risk of default
Considerable startup capital required
Hard work to achieve success
Merchant cash advance industry trends
A quarter century ago merchant cash advances didn’t even exist. But after an ingenious charter school owner devised the technology with her husband in the late 1990s, the concept exploded.
A key advantage of the merchant cash advance business is the easy repayment system, through which the lender automatically receives payments from the borrower’s credit card sales until the debt is fully paid. It’s a hands-off setup for the owner of the cash advance business, giving you more time to focus on marketing and brand-building.
There is some risk, as the default rate is around 10%.
High startup cost
Some business owners who received advances encourage their customers to pay in cash or switch to another credit card company before full repayment of the advanced amount.
How much does it cost to start a merchant cash advance business?
The easiest way to start a cash advance business is to buy a franchise from an existing cash advance firm. Such franchise fees generally cost around $100,000, but could be as low as $25,000. As a franchisee you’ll receive training and marketing materials and be well on your way.
To start your own merchant cash advance business, you’ll likely need initial funding of $200,000, if not more. Most of your startup funds must be ready for borrowing.
Here’s what your investment will cover:
Setting up a business name and corporation
$150 - $200
Business licenses and permits
$100 - $300
Business cards and brochures
$200 - $300
$100 - $300
$100,000 - $200,000
Equipment and cash advance software
$2,000 - $5,000
$103,550 - $209,100
How much can you earn from a merchant cash advance business?
According to small business advisor Fundera, the typical loan factor rate is 1.1 to 1.5. So for every $1 million you loan out in a year, you’d generate $100,000 to $500,000 in interest repayments. The average profit margin is 50%.
In your first year or two, if you advance up to $200,000 at a loan factor rate of 1.1 over three months, you’ll be bringing in $80,000 in annual revenue. This would mean $40,000 in profit, assuming that 50% margin. As your brand gains recognition and you begin to get repeat customers and referrals, you could raise your capital to $500,000 and the factor rate to 1.5 over a longer repayment period of six months. With annual revenue of $500,000, you’d make a tidy profit of $250,000.
What barriers to entry are there?
There are some barriers to entry for a merchant cash advance business. Your biggest challenges will be:
High startup cost
High level of competition
Related Business Ideas
If you’re still not sure whether this business idea is the right choice for you, here are some related business opportunities to help you on your path to entrepreneurial success.
Now that you know what’s involved in starting a merchant cash advance business, it’s a good idea to hone your concept in preparation to enter a competitive market.
Why? Identify an opportunity
Since merchant cash advance businesses don’t have to operate locally, it’s best to do an internet search for MCA competitors in your niche.
Knowing your competitors will allow you to improve on their faults and offer better services to your clients.
What? Determine your products or services
There are many different services you can offer with your MCA business. For example, you can specialize in providing loans to businesses with poor credit scores, becoming their go-to MCA lender.
Specialization can also help you streamline your business, which can boost profits.
How much should you charge for merchant cash advance?
You can answer this question while you’re doing your competitor research. By seeing what they offer, you can use their prices as a starting point for yourself.
Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.
Who? Identify your target market
Here are some potential targets:
Startups unable to wait for traditional loans
Retailers that fail to qualify for other loans
Businesses that receive most payments via credit card
Businesses with regular cash flow issues
Next, you may want to choose a niche within these target markets. For example, you could focus on cafes and restaurants that don’t qualify for other loans.
Where? Choose your business premises
In the early stages, you may want to run your business from home to keep costs low. You can conduct virtual meetings with clients via Zoom and other digital calling tools. But as your business grows, you’ll likely need to hire workers for various roles and may need to rent out a storefront. You can find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.
When choosing a commercial space, you may want to follow these rules of thumb:
Central location accessible via public transport
Ventilated and spacious, with good natural light
Flexible lease that can be extended as your business grows
Ready-to-use space with no major renovations or repairs needed
Step 3: Brainstorm a Business Name
Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.
Here are some ideas for brainstorming your business name:
Short, unique, and catchy names tend to stand out
Names that are easy to say and spell tend to do better
Name should be relevant to your product or service offerings
Ask around — family, friends, colleagues, social media — for suggestions
Including keywords, such as “money” or “cash”, boosts SEO
Name should allow for expansion, for ex: “Jim’s Bakery” over “Jim’s Cookies”
Avoid location-based names that might hinder future expansion
Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these.
Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that set your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.
Step 4: Create a Business Plan
Every business needs a plan. This will function as a guidebook to take your startup through the launch process and maintain focus on your key goals. A business plan also enables potential partners and investors to better understand your company and its vision:
Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
Product and Services: Describe your offerings in detail.
Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
Competitive Analysis: Analyze main competitors, assessing their strengths and weaknesses, and create a list of the advantages of your services.
Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.
Appendix: Include any additional financial or business-related documents.
If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist at Fiverr to create a top-notch business plan for you.
Step 5: Register Your Business
Registering your business is an absolutely crucial step — it’s the prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running.
Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business!
Choose where to register your company
Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to merchant cash advance.
If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state.
Choose your business structure
Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your MCA business will shape your taxes, personal liability, and business registration requirements, so choose wisely.
Here are the main options:
Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
Limited Liability Company (LLC)– Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just needs to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.
We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using ZenBusiness’s online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.
Step 6: Register for Taxes
The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.
Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.
It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.
Step 7: Fund your Business
Securing financing is your next step and there are plenty of ways to raise capital:
Bank loans: This is the most common method, but getting approved requires a rock-solid business plan and strong credit history.
SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund your vision. Entrepreneurial crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
Personal: Self-fund your business via your savings or the sale of property or other assets.
Bank and SBA loans are probably the best options, other than friends and family, for funding a merchant cash advance business.
Federal regulations, licenses, and permits associated with starting your business include doing business as, health license and permit from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits.
You may also need state-level licenses and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more.
Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your MCA business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.
Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account.
Step 10: Get Business Insurance
Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.
Here are some types of insurance to consider:
General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
Business Property: Provides coverage for your equipment and supplies.
Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
Worker’s compensation: Provides compensation to employees injured on the job.
Property: Covers your physical space, whether it is a cart, storefront, or office.
Commercial auto: Protection for your company-owned vehicle.
Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of any of the above insurance types.
Step 11: Prepare to Launch
As opening day nears, prepare for launch by reviewing and improving some key elements of your business.
Essential software and tools
Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks.
If you’re unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.
Some of your business will come from the casual passerby or online visitors, but you should still invest in digital marketing! Getting the word out is especially important for new businesses, as it’ll boost customer and brand awareness.
Once your website is up and running, link it to your social media accounts and vice versa. Social media is a great tool for promoting your business because you can create engaging posts that advertise your products:
Facebook: Great platform for paid advertising, allows you to target specific demographics, like men under age 50 in the Cleveland area.
Instagram: Same benefits as Facebook but with different target audiences.
Website: SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales. Make sure that you optimize calls to action on your website. Experiment with text, color, size, and position of calls to action such as “Avail Now”. This can sharply increase your number of clients.
Google and Yelp: For businesses that rely on local clientele, getting listed on Yelp and Google My Business can be crucial to generating awareness and customers.
Take advantage of your website, social media presence and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include:
Competitions and giveaways – Generate interest by offering prizes for customers who complete a certain action, such as being your 100th borrower of the year.
Signage – Put up eye-catching signage at your store and website.
Flyering – Distribute flyers in your neighborhood and at industry events.
In-Person Sales – Offer your services at industry events and trade shows.
Sponsor events – You can pay to be a sponsor at events that are relevant to your target market.
Seek out referrals – Offer incentives to generate customer referrals to new clients.
Paid ads on social media – Choose sites that will reach your target market and do targeted ads.
Develop your website
Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism. They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google.
You can create your own website using services like WordPress, Webflow, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.
Focus on USPs
Unique selling propositions, or USPs, are the characteristics of a product or service that set it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your merchant cash advance business meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.
Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your merchant cash advance business could be:
Fast advances for businesses with low credit scores
The lowest interest rates in the industry
Focusing on a niche market, like cafes and restaurants
You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a merchant cash advance business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in financial services for years and can offer invaluable insight and industry connections.
The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in merchant cash advance. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.
Step 12: Build Your Team
If you’re starting out small from a home office, you may not need any employees. But as your business grows, you will likely need workers to fill various roles. Potential positions for an MCA business would include:
Loan Officer — tracks loans, repayments, defaults
Office Manager — scheduling and staffing, inventory and office maintenance
Marketing Lead — SEO optimization, social media strategies
At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need.
Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent.
Step 13: Start Making Money!
The day-to-day running of an MCA business will involve screening clients, following up on overdue payments, and finding leads. You may also need to deal with investors if you use them to fund your own business. While it’s not required, you could always enroll in some MCA training to learn from those with experience in the field.
The interesting part of an MCA business is that you’ll actually receive daily payments from your clients’ credit card sales. This means that every time a customer makes a credit card transaction with your client, you’ll be getting paid.
You should now have all the knowledge you need to get your cash advance business up and running, so it’s time to get to work! But you might want to bookmark this guide so you can refer back to it when needed.
You—the merchant cash advance provider—will deduct a percentage of your client’s daily debit or credit card sales until their repayments are made. This provides you with daily cash flow that you can re-invest in new clients instantly.
How can I generate business loan leads?
Search advertising on platforms such as Google or Bing
Social media advertising on platforms like Facebook or Instagram
Having a search engine optimized website
Drop flyers in business’ mailboxes
Is running a merchant cash advance business a good idea?
If you’re willing to put in the work, there is a large piece of the pie for you to get your hands on. With $5 billion – $10 billion in loans generated annually and the average MCA business holding profit margins of 20% – 80%, we’d say yes!
You’ll also receive daily payments from your clients’ credit card sales so your business’s cash flow will never be restricted.