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.
How to Start a Merchant Cash Advance Business
Written by: Esther Strauss
Esther is a business strategist with over 20 years of experience as an entrepreneur, executive, educator, and management advisor.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Published on April 7, 2021
Updated on November 27, 2023
$103,550 - $209,100
$80,000 - $500,000 p.a.
Time to build
1 - 3 months
$40,000 - $250,000 p.a.
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.
Looking to register your business? A limited liability company (LLC) is the best legal structure for new businesses because it is fast and simple.
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.
Industry size and growth
- Industry size and past growth – The MCA industry in the US doubled in five years to reach $19 billion in 2019, according to investment bank Bryant Park Capital.((https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/))
- Growth forecast – Globally, the merchant cash advance market is predicted to perform strongly and surpass $1 trillion in market size by 2028, according to analyst Adroit Market Research.((https://www.adroitmarketresearch.com/industry-reports/merchant-cash-advance-market))
- Number of businesses – In 2019, there were more than a thousand MCA providers across the US, according to financial advisor Money Thumb. The number is expected to be higher now as the industry is growing rapidly.((https://www.moneythumb.com/blog/the-history-future-of-the-merchant-cash-advance-industry/))
Trends and challenges
These are some of the trends in the MCA market:
- Many fledgling businesses turn to alternative funding sources like the MCA instead of waiting for traditional funding approval
- The interest rates on these loans are high, which means so too are the profits.
- Demand is high when businesses are in crisis. For example, at the start of the Covid-19 pandemic, there was a large spike in interest for small business loans.((https://trends.google.com/trends/explore?date=today%205-y&geo=US&q=small%20business%20loans))
Some challenges faced by MCA providers include:
- 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:
|Start-up Costs||Ballpark Range||Average|
|Setting up a business name and corporation||$150 - $200||175|
|Business licenses and permits||$100 - $300||200|
|Business cards and brochures||$200 - $300||250|
|Insurance||$100 - $300||200|
|Capital||$100,000 - $200,000||$100,000|
|Equipment and cash advance software||$2,000 - $5,000||3500|
|Total||$103,550 - $209,100||$106,325|
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
Step 2: Hone Your Idea
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.
Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important, because it can help you understand your customers better, who your competitors are, and your business landscape.
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 Money Lending 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: “Quick Capital Group” over “Medical Cash Advance Group”
- Avoid location-based names that might hinder future expansion
- Use online tools like the Step by Step Business Name Generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.
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.
Find a Domain
Powered by GoDaddy.com
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: A brief overview of your merchant cash advance business, highlighting its key aspects and goals.
- Business Overview: A concise description of your company, its mission, and what sets it apart in the merchant cash advance industry.
- Product and Services: Explanation of the cash advance services and financial products your business offers to clients.
- Market Analysis: An examination of the target market for your merchant cash advance business, including its size, demographics, and trends.
- Competitive Analysis: An assessment of your competitors in the merchant cash advance market, identifying strengths and weaknesses.
- Sales and Marketing: Your strategies for attracting clients and promoting your merchant cash advance services.
- Management Team: Introduction to the key individuals leading your business, highlighting their relevant experience and qualifications.
- Operations Plan: Details about the day-to-day operations, including technology, location, and staffing for your merchant cash advance business.
- Financial Plan: A comprehensive overview of the financial aspects, including revenue projections, funding requirements, and break-even analysis.
- Appendix: Supporting documents and additional information, such as resumes, charts, and legal documents, that provide further context for your merchant cash advance business plan.
If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist to create a top-notch business plan for you.
Step 5: Register Your Business
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 an 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.
The IRS website also offers a tax-payers checklist, and taxes can be filed online.
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.
Step 8: Apply for Business Licenses and Permits
Starting a merchant cash advance business requires obtaining a number of licenses and permits from local, state, and federal governments.
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.
You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.
This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties.
If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.
Step 9: Open a Business Bank Account
Before you start making money you’ll need a place to keep it, and that requires opening a bank account.
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.
- Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero.
- 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.
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.
You can create your own website using website builders. 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.
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.
For your merchant cash advance business, the marketing strategy should focus on highlighting the speed, flexibility, and convenience of your financial services. Emphasize how your cash advances can help businesses manage cash flow, invest in growth, or handle unexpected expenses.
- Professional Branding: Your branding should convey trust, financial acumen, and business support. This includes a professional logo, business cards, and a well-designed website.
- Direct Outreach: Network with small business owners, attend local business events, and join business associations. Offer educational content that illustrates how MCA can be a tool for business growth.
Digital Presence and Online Marketing
- Professional Website and SEO: Develop a website that clearly explains what merchant cash advances are, the benefits, application process, and repayment terms. Use SEO best strategies to rank for searches related to business financing, short-term loans, and alternative lending.
- Social Media Engagement: Utilize LinkedIn for networking with business owners and sharing financial tips. Use Facebook and Twitter to post about business financing, success stories, and company news.
Content Marketing and Engagement
- Financial Education Blog: Share informative content on financial management, the advantages of MCAs, and tips for small business growth.
- Email Newsletters: Regular newsletters can keep potential clients informed about the latest in small business financing, new financial products, or changes in lending regulations.
- Webinars and Online Workshops: Host online sessions covering financial education for small businesses, explaining the use and benefits of MCAs.
Experiential and In-Person Engagements
- Financial Seminars and Networking Events: Conduct seminars or networking events focusing on small business finance, where you can introduce MCA and its benefits.
- Participation in Business Expos: Attend business expos and trade shows to showcase your services and connect with potential clients.
Collaborations and Community
- Partnerships with Business Consultants: Partner with business consultants and financial advisors who can refer clients to your services.
- Collaboration with Business Associations: Engage with local business associations to offer advice and services to their members.
Customer Relationship and Loyalty Programs
- Referral Programs: Implement a referral program that rewards existing clients for referring new businesses to your services.
- Customized Financial Solutions: Provide tailored financial solutions to repeat clients, showing a deep understanding of their business needs.
Promotions and Advertising
- Targeted Online Advertising: Use platforms like Google Ads and LinkedIn to target business owners who may be in need of quick financing.
- Content Marketing: Produce and distribute educational content that helps businesses understand the role and benefits of MCAs in their financial strategy.
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: Run a Merchant Cash Advance Business – 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.
Frequently Asked Questions
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.
- Search advertising on platforms such as Google or Bing
- Social media advertising on platforms like Facebook or Instagram
- Through partnerships
- Having a search engine optimized website
- Drop flyers in business’ mailboxes
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.
Generally, a cash advance refers to a short-term loan obtained through a credit card or a line of credit. It allows the borrower to withdraw cash from their credit limit or access funds directly from their credit card account. Cash advances typically come with high-interest rates and may have additional fees.
On the other hand, a cash loan usually refers to a short-term loan obtained from a financial institution or lender. It involves borrowing a specific amount of money and repaying it with interest over a predetermined period. Cash loans are typically repaid in fixed installments.
Merchant cash advance services are commonly used by small businesses, particularly those in the retail or service industry, who accept credit card payments. These businesses may experience fluctuations in cash flow or require immediate funds for various purposes such as inventory purchases, equipment upgrades, marketing campaigns, or managing unexpected expenses.
How to Start a Merchant Cash Advance Business
Subscribe to Our Newsletter
and gain insider access to cutting-edge business insights and trends.