Merchant cash advances are one of the most innovative products in alternative business finance. The concept has only existed for a few years, but it’s already proving very popular with retail businesses and the leisure sector. Put simply, a merchant cash advance uses your card terminal to 'secure' lending — perfect for businesses without many assets, but who have a good volume of card transactions every month. Repayments are then taken as a proportion of your revenue, making it a quick and easy funding solution for many SMEs.Get a merchant cash advance
A merchant cash advance is a type of business funding that is designed to help businesses gain access to the cash they need in a flexible way. The lender provides the business with a sum of money which it pays back through a percentage of its customers’ card payments.
Merchant cash advances can be suitable for a wide range of businesses. This type of finance can also be easier to access than other more traditional forms. A merchant cash advance can also be a useful funding solution for businesses with no or few assets, as well as those who require capital for growth but have a limited credit history.
Merchant cash advances are one of the most innovative products in alternative business finance. The concept has only existed for a few years, but it’s already proving very popular with retail businesses and the leisure sector.
Put simply, a merchant cash advance uses your card terminal to 'secure' lending — perfect for businesses without many assets, but who have a good volume of card transactions every month. Repayments are then taken as a proportion of your revenue, making it a quick and easy funding solution for many SMEs.
Any business that uses a card terminal to take payments from customers will have a card terminal provider — the company that processes transactions for them. With a merchant cash advance, the lender works with the terminal provider so they have visibility on what’s happening, and how much money is flowing through your business.
That means that unlike other types of lending, there’s no need for credit checks or a detailed look into your accounts.
In theory, any business that receives payment via a card terminal can get a merchant cash advance. And because the lender can quickly see what the business makes over an average month, they can agree a loan amount and a repayment plan much faster than with other options — so it can be a great solution for businesses that don’t have valuable assets, or need cash fast.
A merchant cash advance works by the business (or ‘merchant’) borrowing a sum of money from the lender then paying it back incrementally through customer card payments. As with other types of business finance, you can use the loan to optimise and grow your business.
A merchant cash advance is a type of finance that adapts to your business and how much money it makes, giving you more confidence when it comes to affording the repayments. How much you can actually borrow will depend on a number of factors, including your average turnover and how much you can viably afford to repay in the eyes of the lender.
There’s a variety of merchant cash advance lenders out there today. Funding Options can help you select the most appropriate lender for your needs and circumstances. Although the concept is the same, products will differ depending on the lender. For instance, some may have higher interest rates than others, take longer to repay or have different T&Cs.
Usually repayments are made as a percentage of revenue — so they go up and down proportionally 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.
Another benefit of merchant cash advances is that repayments can seem relatively painless. Because 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.
One more benefit of a merchant cash advance is that it effectively opens a new line of credit. It’s possible to get other types of finance for your business 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 cashflow at the same time.
A restaurant has a fridge break down in the middle of the seasonal boom — it needs to be replaced as quickly as possible
Merchant cash advance set up based on the previous months’ sales
Funds advanced immediately, so the new equipment is on site within days
Repayments made as a percentage of revenue over the remaining seasonal period
Although fees can be high, merchant cash advances have many potential benefits for businesses. For example, if approved, you can get access to funding very quickly; in some cases a decision is made within just 24 hours.
This makes it potentially suitable for business owners who need quick access to cash and can’t afford to wait weeks for a lender to come to a decision.
The application process can be relatively pain-free too, with minimal paperwork required. You’ll usually not have to offer collateral, meaning your assets - such as a car, property and equipment - won’t be at risk like they would be when it comes to other forms of business finance.
The automatic repaying of the loan through card payments eliminates the chance of late loan repayment charges, and there’s no minimum payment. The more you earn, the quicker the loan will be paid off in full (and vice versa).
With a traditional business loan, on the other hand, repayments stay the same every month which means they run the risk of becoming unaffordable during quieter trading times. Finally, because you know exactly how much you have to repay, the cost of the merchant cash advance is transparent from the beginning.
Merchant cash advances are just one option of many business finance solutions out there. It could be that another product - such as asset finance, a short-term business loan, or a revolving credit facility, are more appropriate for your needs.
Merchant cash advances have lots of benefits, but there are some drawbacks to consider too. First, the amount you can borrow depends on your turnover — if you want to borrow £5,000 but your business makes £1,000 per month, you’ll be unlikely to secure that level of lending because it’s not in line with your cashflow position. The general rule-of-thumb is that you’ll be 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.
Second, if your business receives payment in a variety of different ways, merchant cash may not be a perfect solution, because it’s best-suited to firms who do the majority of their business via a card terminal.
If your company takes card payments but also invoices customers and receives bank transfers, there may be a different finance choice that fits your needs better.
Finally, many lenders only work with specific terminal providers, which means your choice might be limited depending on the provider you currently use. However, there are some who work with a wide range of terminal providers — our team can talk you through your options to find the one that suits you best.
The leisure sector — for example bars, restaurants, clubs and shops — is traditionally more difficult to get finance for. But if your cashflow situation is positive, a merchant cash advance could be a great way to secure fast and straightforward business finance, and get your business on the right track.