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Merchant Cash Advance

Merchant Cash Advance Loans

A merchant cash advance is a finance solution that allows businesses to borrow and repay automatically through future credit and debit card takings. They can be fast and flexible, but may be more expensive compared to other types of business loans.

Merchant cash advances are a popular finance option for retail and hospitality businesses, particularly those that tend to have slow sales periods or seasonal peaks and troughs.

Unlike standard business loans which carry fixed monthly repayments, a merchant cash advance (MCA) is repaid as a set percentage of future card sales, plus fees. This means the amount you repay each month will vary according to your takings, making it easier to meet the repayments during lean periods.

How does a merchant cash advance work?

When you apply for a merchant cash advance, the lender will look back at your credit and debit card sales data, typically for the last three to six months. If approved, you will be offered a loan amount based on your average sales.
The amount you borrow will include a ‘factor fee’ or ‘funding fee’, plus any other charges such as a set up fee.
You will then be given a repayment plan, based on an agreed ‘split percentage’ of future card sales.
You receive the funding upfront.
Your repayments will be taken automatically as a percentage of your card sales until the balance is paid. Most businesses repay their MCA in around six months.

» COMPARE: Best business loans

What is a factor fee?

Merchant cash advances work slightly differently to standard loans in that you don’t usually pay interest in the normal sense. Instead, you repay the advance plus a fixed funding cost, sometimes known as the factor fee or funding fee, which is usually a fixed multiplier of 1.2 – 1.5 applied to the amount borrowed. For example, borrowing £10,000 with a 1.2 factor means a today sum of £12,000, including the £2,000 fee.

What is a split percentage?

This is the percentage of sales you will repay to the provider each month until the loan is repaid. This varies between providers, but is typically between 10% and 30%. So, if the split percentage is 10% and you make £10,000 of card sales each month, you will repay £1,000 per month until the balance is cleared. The higher the split percentage, the faster the loan will be repaid.

How much does a merchant cash advance cost?

The total amount you’ll need to repay can vary depending on the amount you borrow, the factor fee and the split percentage. However, as the cost is worked out according to a factor rate, not interest, the amount you owe won’t increase if it takes you longer to repay – and neither will you save any money if you repay early.

How does a merchant cash advance compare to a business loan?

The main difference between a merchant cash advance and a business loan is the way that the funds are repaid. While business loans require a fixed monthly repayment, a merchant cash advance is repaid as a percentage of card sales – so if you have a quiet month you will repay less, but your payment will increase during busy periods.

How could a merchant cash advance help your business?

A merchant cash advance could be useful if you need capital to cover emergencies, expenses or expansion costs. It can work as short-term safety net, and help you to cover a range of business expenses including:

Equipment or vehicles.
Inventory and stock.
Repairs and maintenance.
Marketing campaigns.
Operational costs.

What are the pros and cons of a merchant cash advance?

Always consider the positives and potential drawbacks of taking out a merchant cash advance before applying, as they may not be the best option for every business.

Advantages:

Unlike traditional business loans, your repayments are flexible as they adapt to your revenue. This can make it easier to meet repayments during quiet periods.
They don’t usually have fixed terms, so you just keep paying until the debt is cleared.
The application process can be quicker and easier than other types of business finance, meaning you may be able to access funds on the same day.
You might be able to qualify even if you have poor credit, as eligibility is based on future card sales rather than your credit score. As a result, many providers will only carry out a soft credit check – although they will need to know about your existing debts and see your financial records.

Disadvantages:

The monthly repayments could affect your cashflow.
High fees can make a merchant cash advance an expensive way to borrow compared to traditional business loans.
You won’t save any money on interest or fees if you pay early.
The amount available to borrow depends on the value of projected card sales – so if business has been slow you may only be able access a small amount.

» MORE: Types of business loans

Is my business eligible for a merchant cash advance?

Merchant cash advances are aimed at businesses that take regular debit and credit card payments, and have a track record of card payments that the provider can assess. Providers will ask why you need an MCA, and will also take your revenue into account when deciding how much funding you can access.

Lenders will usually expect to see:

An established trading history, usually of at least six months.
A minimum monthly volume of card transactions, often of at least £2,500.
Consistent revenue.
Some lenders may also require a collateral or a personal guarantee.

Although the application process varies between providers, you will usually need to show the following to ensure that your business can afford the repayments:

Bank statements and / or accounts.
Card processing statements.
Balance sheets.

» MORE: How to get a business loan

How to find a merchant cash advance through NerdWallet UK

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Alternatives to merchant cash advances

Merchant cash advances are designed only for businesses that take regular card payments and need a short-term funding solution. If this doesn’t apply to your business, it’s worth considering one of the following alternatives:

Invoice financing

Another short-term funding option, invoice financing is aimed at B2B businesses that have capital locked in unpaid invoices. The provider essentially pays you the bulk of the value of your invoices up front, and you get the remainder minus fees and interest once your invoices are paid.

» COMPARE: Invoice finance

Business credit card

A business credit card is a more general short-term funding solution, ideal for everyday business spending rather than long-term cash flow. You can avoid paying any interest on what you borrow if you pay back what you owe on time every month.

» COMPARE: Business credit cards

Unsecured business loan

For longer term borrowing, you might want to think about taking out a traditional business loan. Unsecured business loans don’t require any collateral, and are based on your business turnover and credit history. However, they can also be more expensive compared to secured loans, owing to the lack of security, and you may be asked to provide a personal guarantee.

» COMPARE: Unsecured business loans

Secured business loan

Secured business loans are another alternative, and unlike unsecured loans these are tied to collateral – you’ll normally need to provide business assets as security for the loan. On the plus side, the added security means these loans are easier to qualify for, and often come with more agreeable terms compared to unsecured loans.

» COMPARE: Secured business loans

The amount of your merchant cash advance depends heavily on your card takings as well as the provider, but it can generally range from £1,000 to £500,000. Each lender has a different borrowing ratio. At the higher end, some will lend at a rate of 200%, meaning that for every £1 of takings you can borrow £2.

This varies, but with some lenders you could receive funds within 24 hours.

Generally, merchant cash advances don’t require collateral, but in some circumstances you may be required to provide a personal guarantee.

Merchant cash advances don’t have fixed repayment terms, so they’ll last until you’ve made your final repayment – the more sales you make, the faster you repay the loan.

In many cases you can repay a merchant cash advance early, but this is unlikely to save your business any money as most providers charge a fixed fee rather than interest. However, some may offer incentives for early repayment so it’s best to check with the lender.

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