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What is a merchant cash advance?

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.

Can I get a merchant cash advance?

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.

What are the benefits of merchant cash advances?

Flexible and scalable finance

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.

Easy repayments

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.

Frees up other forms of finance

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.

Merchant cash advances: an example case

  • 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

What are the downsides?

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.

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