A merchant cash advance is a novel source of finance for SMEs in the UK

Merchant cash advances are one of the most innovative products in alternative business finance. Merchant cash advances let businesses use a card terminal to 'secure' lending — perfect for those without assets but with an adequate volume of customer card transactions.

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A merchant cash advance is a novel source of finance for SMEs in the UK

A merchant cash advance is a type of business financing particularly well suited to a small business that accepts debit and credit card payments from customers.

The lender provides the company with a cash advance which it repays as a percentage of its customers’ card payments using a card terminal

How do merchant cash advances work?

A business owner can access cash as soon as a merchant cash advance company approves the business for a fixed amount. This amount is then repaid with fees, using a percentage of future revenue.

Merchant cash advance repayments can be structured in two ways: as a percentage of card sales or as fixed withdrawals from a bank account.

1. Percentage of debit / credit card sales

This is the traditional way of structuring an MCA. A merchant cash advance provider deducts a daily (or weekly) percentage —typically around 10%— of debit and credit card sales until the amount is repaid in full.

In contrast to other business loans, merchant cash advances don’t have typical repayment terms. This is because the repayment timeline is based on sales. Repayment terms can take anywhere from three to 18 months. The higher your credit card sales, the faster you’ll repay the advance.

2. Fixed withdrawals from a bank account

An alternative method of repaying your merchant cash advance is to withdraw funds directly from your business bank account. This approach means fixed repayments are made daily or weekly from your account, which is not dependent on sales. The fixed repayment amount is based on an estimate of monthly revenue.

This type of repayment structure allows you to calculate precisely how long it will take you to pay the advance back based on the amount borrowed and can be better suited to businesses that don’t rely heavily on debit and credit card sales.

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Benefits of a merchant cash advance

Merchant cash advances come with a variety of benefits, including:

Flexibility - Your business only pays back the loan when it receives customer card payments, meaning that repayments are linked to sales, so you can better manage cash flow.

Access - Depending on the lender and application process, you can get approved for a merchant cash advance within 24 hours

Unsecured - Merchant cash advances are a type of unsecured business finance. You don’t need to put forward collateral, making it less risky than traditional financing.

Application process - When applying for a conventional loan, traditional lenders may require a business plan, but merchant cash advance lenders will not.

A provider will instead look at your sales history. The lender may be able to access your merchant account statements online, which saves you from having to submit them via email or post, saving you time.

Credit ratings - Because funding is secured by the lender gaining visibility into your sales, credit ratings are not usually taken into account.

Risk - Repayments are automatically taken from the money you receive from customer card payments. There is less risk of defaulting on your loan and incurring late payment fees.

Transparency - The amount you pay back doesn’t change. The lender will tell you what the total cost is at the outset.

Flexible and scalable finance

Usually, repayments are made as a percentage of revenue so they fluctuate with your business’s income. That means when things are going well, you pay more back each month, but if the business is going through a lean period you’ll pay a smaller amount. It’s a good arrangement for many companies because, unlike fixed payment finance, you can have more reassurance that you’ll be able to make payments if you hit a bump in the road.

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Easy repayments

Repayments for merchant cash advances are relatively painless as the lender works directly with the card terminal provider. The percentage they take for repayments is never in your business’s bank account, but instead is ‘taken at source’ — in much the same way that most people pay income tax.

Unlike other types of finance, the money is taken automatically until the debt is paid, so it’s a ‘hands-off’ setup from the point of view of the business owner. That means you can spend less time worrying about finances, and more time running your business.

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Frees up other forms of finance

Another benefit of a merchant cash advance is that it effectively opens a new line of credit. Your business can use other types of finance at the same time as a merchant cash advance, which can be useful for lots of businesses. For example, if you have an equipment lease already, it’s possible to get a merchant cash advance for more general cash flow at the same time.

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Who can apply for a merchant cash advance?

If you are a business that receives payments via a card terminal, you’ll be able to apply for a merchant cash advance.

As the lender has transparency into what the business makes in an average month, they can agree on a business loan amount and a repayment plan faster when compared to other short-term financing alternatives. This makes it an excellent solution for businesses that don’t have valuable assets or need cash quickly for ad-hoc expenses.

Is a merchant cash advance good for my business?

Merchant cash advances can help you get funding very quickly — a decision is often made within 24 hours. This makes it suitable for business owners struggling with liquidity and who can’t afford to wait weeks for the normal lending approval process.

It's limited by cash flow

If you want to borrow £5,000 but your business makes £1,000 per month, your business is unlikely to secure that level of lending as it’s not in line with your cash flow position. You’re generally able to get finance equivalent to what your business receives in an average month — so for the example above, £1,000 is a much more realistic figure.

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Not suitable for multiple payment businesses

If your business receives payment in a variety of different ways, merchant cash may not be a perfect solution. It’s best-suited to businesses that do the majority of their business via a card terminal.

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Lenders are specific with terminals

Another point to consider is that many lenders only work with specific terminal providers, which means your choice might be limited depending on the provider you currently use. There are some lenders who do work with a wide range of terminal providers and our team can talk you through your options to find the one that suits you best.

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The application process requires minimal paperwork. You won’t necessarily have to offer collateral, thus reducing your risk and, importantly, your car, property and equipment will be kept separate from the business. This is not the case with other types of finance for business growth

The automatic loan repayment through customer card payments means that you won’t incur late loan repayment charges, and there’s no minimum payment required, so the more you earn, the quicker you can pay off the loan in full. Unlike fixed payment finance, you can have peace of mind that you’ll be able to make payments even if sales experience a downtick.

With a traditional business loan, repayments stay the same every month, which means you might experience cash flow problems during quieter trading times. With a merchant cash advance, you know exactly how much you have to repay — this is clearly defined from the beginning. 

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Merchant cash advance vs bank loan

A cash advance is an ideal approach to access business funding for a business registered in England and can be used as a novel funding source compared to a traditional bank loan.

Why is that?

  • It’s faster to access than a bank loan, with applications approved in days.

  • In contrast to a bank loan, nobody will ask you for a business plan.

  • Once you are up and running, there is no need to change provider or bank.

  • Unlike the fixed loan repayments with a bank, payback is based on revenue.

  • A bank will always ask for collateral. This is not the case for a merchant cash advance.

What can you use the cash advance for?

That depends on the business, but most businesses need additional funding at some stage. The advance can be used for operational expenses, capital expenditure, marketing costs etc. Businesses might need cash for the following:

  • Renovation

  • Expansion

  • Inventory

  • Equipment repairs/upgrade

  • Website development

  • Emergency funding

  • Marketing/Training

  • Trade Shows

  • Product launches

In brief, merchant cash advances are an easy, low-risk method to get short-term capital for a business. Yet this is just one of the many business finance alternatives available to business owners. Other products such as asset finance, a short-term business loan, or a revolving credit facility, might be better suited to your business.

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