Merchant cash advances – what are the features and benefits?

18 Jul 2022

Merchant cash advances can be flexible and fast to obtain. Used predominantly by retail, hospitality, and leisure companies – and businesses that rely on card payments from other sectors – to access unsecured finance. But how do they work, and what are some benefits and things to consider before applying?

Merchant cash advances – what are the features and benefits?

What is a merchant cash advance?

merchant cash advance (MCA) enables a business to borrow cash repaid at source through a percentage of its future card transactions. 

Repayments are made daily, weekly or monthly. MCAs are designed for businesses that take many card payments. A wide variety of business types include restaurants, eCommerce businesses, physical stores, hotels, beauty salons, and more. 

Merchant cash advances can be more accessible than traditional finance types, such as a secured loan from a bank. You might not need to offer an asset as security, and your credit history isn’t as crucial to the lender elsewhere. 

Instead, MCAs are based on how the business performs and its customer payment turnover. So, if you’ve been rejected for other types of business funding, you still might be able to obtain a merchant cash advance. 

Short-term business finance

A merchant cash advance is a type of short-term business finance paid back over a short period. This can make it work for SME owners who require growth funds and want to repay their finance quickly. 

MCAs can fund a variety of legitimate business purposes. For example, you might use it to buy stock, refurbish your premises, boost cash flow, pay a bill or invest in marketing.

How do merchant cash advances work?

If you opt for a merchant cash advance, the lender will liaise with the company that processes your customer card transactions. 

They’ll be able to see how many payments you take and will use this data to determine how much to lend you and the terms for paying back the finance.

As with other finance types, the cost of the loan will depend on a range of factors, including your sector, credit rating, turnover and volume of transactions. Instead of paying a set amount every month as you would with a regular term loan, repayments are based on how trade is going, and the repayments are taken “at source”. 

You’ll pay the same percentage of your customer card payments, but the amount you pay each day, week or month will adapt to your business’ income. This level of flexibility can be valuable for companies that experience seasonal peaks and troughs.

Costs include the factor rate and the multiple of the advanced sum you will have to repay. There’s also the holdback percentage and any additional lender fees.

Merchant cash advance benefits:

  • Adaptable – repayments align with how much money your business makes through customer card transitions.

  • It may not require a business asset as security; it might be suitable for companies with few or no assets or limited credit history.

  • It can be quick to obtain – sometimes within 24 hours.

  • Repayments are taken at the source so you can focus on running your business.

Merchant cash advance considerations

  • MCAs are for businesses that process payments using a card terminal. You won’t be eligible if you operate in cash, bank transfers or cheques.

  • The lender will usually provide a loan amount equal to one to two times your monthly card turnover, so if you need more, it might be worth looking at a different type of finance. 

  • If you default you could face severe consequences, such as a bad credit rating, civil lawsuit, bankruptcy or the loss of a personal asset. You should make sure you can repay the finance before accepting an MCA.

 With so many types of finance and lenders on the market today, it can be challenging to know where to look. You can use Funding Options to apply for a merchant cash advance. Our Funding Cloud technology validates your business profile and matches you with the business funding industry’s most significant lender network.

Our dedicated Business Finance Specialists are on hand to help you through the whole process, from application to money in the bank. Start your funding journey today.

Get a merchant cash advance

Vivek Seda
Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

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