Financing Your Advertising Startup with Business Credit, Merchant Cash Advances vs. Cash Flow Financing. Which is Better?

 Your Advertising Startup and You

Starting a business. It could be one of the most exciting times in your life.

It conjures up images of late nights, or working out of your garage. It evokes dreams of disrupting industries and kicking the old ways to the curb. With an advertising startup, you might be trying to improve upon older technologies, or developing an app. Or you might be getting a more traditional-style agency off the ground. That’s an advertising startup, too.

According to Investopedia, a startup is, “…a company in the first stages of operations. Startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. These companies generally start with high costs and limited revenue, which is why they look for capital from a variety of sources such as venture capitalists.”

Because the first stages of a company’s operations aren’t limited by time, you can have a startup that’s a few months or even a few years old. Your startup doesn’t have to be fresh out of the box, barely past the initial ideas stage in order to be called a startup.

But no matter what, sooner or later, everyone in a startup asks the same question.

How do we pay for all this?

Investopedia (above) didn’t list every single way to get financing. There are forms of lending, there are angel investors, and there are lots of other ways to get business cash, including credit. So let’s explore and compare a few.

Spending Money to Make Money

We’ve all heard the expression that you’ve got to spend money to make money. But did you know it’s likely been around since 200 BC?

Our tablets are electronic and not stone these days. But the saying still holds true. To get moving, you’re most likely going to have to lay out at least some cash, particularly right at the beginning.

But let’s circle back to those other ways to finance a startup venture.  In order to explore them, we need to talk about something called fundability.

Fundability and Your Business

Fundability is the ability of a business to get funding. It covers all the points a lender or credit provider will check when trying to figure out if you’ll pay back a loan or credit extended to you. Fundability means your business is properly licensed. For example, in Massachusetts, if you want to engage in any outdoor advertising, you need to have a license for that.

Fundability also means getting an EIN from the Internal Revenue Service. And it means getting a D-U-N-S number from Dun & Bradstreet. It often also means having a business bank account, which is a good idea no matter what, so you don’t accidentally commingle business and personal funds. That can be a real problem for startups of all stripes with only one employee, the owner.

You don’t want to be on the business end of an audit, so a separate bank account is one of the ways to reduce the chances of that happening.

But what’s all this fundability for?

Start Thinking Like a Lender

Put yourself in a lender or creditor’s shoes. When you think like a lender, you come to understand one thing. All they truly want is to be sure that you’ll pay them back. Lenders and credit providers look at one of three things for loan or credit approval: cash flow, collateral, and/or credit. The more of these you have, and the more robust yours are, the more funding options are available.

Let’s start with one which can work for a startup that’s past its very first stages and is already making some money. If that’s not you, don’t worry! Read on; we’ve got you covered.

Can Cash Flow Financing Help YOUR Advertising Startup?

For advertising going concerns which have some time in business, cash flow financing can be used to fund expansion, growth, or everyday needs. But just what IS cash flow financing? And where do you get it?

Cash flow financing is a loan. The loan is backed by a company's expected cash flows. A company's cash flow is the amount of cash that’s flowing in and out of a business, within a specific period. Cash flow financing or a cash flow loan uses generated cash flow as your way to pay back the loan. Essentially, you’re betting on future profits to pay for a present-day loan.

Cash Flow Financing: Terms and Qualifying

Much of the time, you are going to have to have a few years in business. And you may need a certain minimum personal credit score (FICO score). You must prove historical cash flow. And you’ll need to present your accounts receivables and accounts payables. This way, the lender can determine how much to loan to your business.

Here’s where robustness comes in handy. A better FICO score and greater historical cash flow will get you more money.

Now let’s pivot to merchant cash advances (MCAs).

Will Merchant Cash Advances Help Out YOUR Advertising Startup?

An MCA technically isn’t a loan. Rather, it is a cash advance based upon the credit card sales of your business. A small business can apply for an MCA, and have an advance deposited into its account fairly quickly. So you can offer net 30 terms, but not have to wait a month to get paid.

Net 30 just means a company or person you extend credit to will have thirty days in which to pay the bill in full. Keep that term in mind because net 30 will come up later in this post.

A merchant financing program can work for business owners who accept credit cards, and want fast and easy business financing. An MCA program is designed to help you get funding, based strictly on your cash flow as verifiable per your business bank statements.

Merchant Cash Advances: Terms and Qualifying

A lender will review a few months of bank and merchant account statements. They are looking for consistent deposits. They want to see deposits showing revenue is meeting a certain annual or monthly minimum. They will also verify time in business, often the minimum is a good six months or more.

Lenders also want to see that you don’t have a lot of Non-Sufficient-Funds (NSFs) showing on your bank statements. They don’t want to see a lot of chargebacks on your merchant statements. And they want to see that you have more than a minimum number of deposits in a month going into your bank account (often this figure is around ten). In a nutshell, they want to see that you manage your bank and merchant accounts responsibly. They will also want to see that your business has a decent number of consistent credit card transaction deposits each month. What a merchant cash advance lender considers to be ‘decent’ is going to vary from lender to lender.

But be aware: interest rates for merchant cash advances can be high.

MCAs vs. Cash Flow Financing

They look rather similar, right? Here are a few differences.


Cash Flow Financing

Lenders look at credit card sales

Lenders look at all cash flow (credit card sales can be a subset of this)

Often requires at least 6 months in business

Can require a year or more in business

Lenders want to see bank statements

Lenders want to see accounts receivable and accounts payable

Depends on future payments to the business by customers as the way to pay back the advance

Depends on future company profits as the way to pay back the loan

No interest: you just pay a fee for the service of the lender advancing you the funds

You pay interest on the loan

Often requires a lower minimum FICO score than cash flow financing

Can often require a higher minimum FICO score than for merchant cash advances

Now let’s add business credit to the mix.

Business Credit

Business credit is credit in the name of a business. Much like you have a FICO score and credit cards, your business can have an EIN (now you see why you need one?) and credit cards, lines of credit, loans, and other forms of borrowing.

Business credit does not come under the Fair Credit Reporting Act. As a result, you don’t get a free credit report every year – and anyone can check out your business credit reports. They don’t need a ‘permissible purpose’, which is what you would need if you wanted to look at someone’s personal credit report.

Hence if you wanted to satisfy your curiosity and look up the business credit report for Disney or Tesla or Google, Dun & Bradstreet would be more than happy to sell a copy to you.

One Thing to Remember with Business Credit

Your business doesn’t get it automatically. You have to build it. This is different from personal credit. With personal credit, you may have gotten credit card offers when you graduated high school or started college or your first job. In any of these instances, a credit card company saw you as a decent credit risk, although they probably didn’t grant you terribly high limits. Then you paid off your debts and your limits started to increase. Visa and MasterCard eventually offered you cards and suddenly you had personal credit – and good personal credit, at that.

Not so with business credit. You need to work with a creditor which will report to one of the three big business credit reporting agencies. They are Dun & Bradstreet, Experian, and Equifax.  The latter two also report on personal credit.

With business credit, you’ve got to actively build it. And one significant issue with business credit is that over 90% of all vendors and credit providers will only report to the business credit reporting agencies if you pay on time. But they have no problem reporting any defaults or late payments!

As a result, you need to work with vendors which report positive payment experiences. With a low (or even nonexistent) business credit score, how do you get started?

Starter vendors.

Starter Vendor Credit

Starter vendors are open to working with most businesses, even startup ventures. In general, these vendors report to the business CRAs within 60 days. Build your business credit profile and score by purchasing products you use all the time, like computers, mice, ink and toner, computer peripherals, etc.

Terms will vary depending on the vendor, but they tend to be net 30. But the beauty of starter vendors is you will not need collateral, good personal credit, or cash flow to be able to do business with them.

Retail Credit

If you’ve gotten at least three vendors to report to business credit reporting agencies, and you have a D-U-N-S number, you will get what’s called a PAYDEX score. A PAYDEX of 80 (the gauge goes up to 100) is considered good and will start to open doors to more credit.

Retailers will check whether your business is properly licensed, and qualifications will vary. There can be a minimum time in business requirement. There may even be a minimum number of employees requirement, or a minimum annual sales requirement. Terms can be revolving.

Bank Credit Cards

Going beyond retail credit means getting to bank credit cards. These come from universal-type credit card providers like MasterCard or Visa. So they can be used pretty much anywhere and may even have rewards programs.

Terms can be revolving, rather than net. Usually, you will need to have at least 14 accounts reporting to the business credit reporting agencies. There can be longer time in business requirements, and may also be minimum number of employee requirements.

Business Credit vs. MCAs vs. Cash Flow Financing

Let’s compare these options for business funding for advertising startups.


Cash Flow Financing

Business Credit

Lenders look at credit card sales

Lenders look at all cash flow (credit card sales can be a subset of this)

Starter credit providers will look at your business setup; once you have a PAYDEX score, they’ll check that as well

Often requires at least 6 months in business

Can require a year or more in business

Starter vendors generally don’t have time in business requirements, but retail and bank credit providers do

Lenders want to see bank statements

Lenders want to see accounts receivable and accounts payable

Starter vendors want to make sure you’ll pay them back, so they’ll check fundability (do you have EIN and D-U-N-S numbers? Do you have any requisite licensing? Etc.)

Depends on future payments to the business by customers as the way to pay back the advance

Depends on future company profits as the way to pay back the loan

Doesn’t depend on anything in particular to pay it back although it’s best to pay from business assets/profits

No interest: you just pay a fee for the service of the lender advancing you the funds

You pay interest on the loan

No interest if you pay on time. If not, then rates vary. Better FICO scores and/or better business credit get you better rates

Often requires a lower minimum FICO score than cash flow financing

Can often require a higher minimum FICO score than for merchant cash advances.

Better FICO scores help you get better rates and some providers may require them

So, Which is Best?

If you just opened your doors yesterday, business credit will be the best way to go as starter vendors may not have time in business requirements (or sometimes you can secure a card with cash to get your business started). For an advertising startup with more time in business, MCAs can be a way to get fast cash while still offering good terms to your clientele as you build your business. And for more time in business, if your cash flow is stable, cash flow financing is a viable option.

And there’s no reason you can’t try two of these or even all three, and see what works best for your circumstances.

Best of luck with your advertising startup!

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