Merchant Cash Advance
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Author: Gary Hemming CeMAP CeFA CeFA CSP
20+ years experience in business finance
A merchant cash advance allows you to borrow money against your future card receipts and is a popular form of business finance for those who take payments through a card terminal.
They’re a fast and flexible way to get a cash injection for your business, with many providers providing funds within 1-3 days.
What is a merchant cash advance?
A merchant cash advance, also known as a business cash advance is a type of business finance that allows you to leverage your future card receipts to provide working capital to your business. For this reason, this type of funding is considered a form of working capital finance.
It works in much the same way as a business loan in that a cash lump sum is paid into your business bank account once your application has been approved.
The big difference comes in how your application is assessed and how the facility is repaid.
Do they work like a business loan?
Yes, as mentioned above, in many ways they work like a business loan, other than 2 key differences.
The first is how the application is assessed. Your potential lender will assess the application based on your future card receipts specifically, rather than your total turnover.
This means that the maximum you can borrow will be restricted by only this income, with any other turnover being ignored. Secondly, your facility is repaid daily, at an agreed percentage of your total card receipts for the day.
If your card receipts are higher than expected, the funds are repaid faster. On your slower days, you will repay less.
How do they work?
An MCA works by releasing funds to you (the cash advance) based on the payments received through your card terminal. To validate how much you can borrow, the lender works with your card terminal provider to understand the volume of card payments as the funds are released on the strength of card receipts.
From there, your repayments begin, through a small deduction from your daily card receipts, which are redirected to your lender to repay the facility.
As repayments are handled automatically, merchant cash advances are a simple way to borrow that require almost no management from the business owner once set up.
Can I get out of a merchant cash advance early?
Yes, you can repay your cash advance early at any time without penalty.
That said, as your advance is based on a factor rate, rather than an interest rate, there will be no saving for doing this.
If your business does accumulate surplus funds and has plenty of working capital to support business operations, then you can weigh up the pros and cons of early repayment.
One advantage of repaying early is that you will no longer have to pay the deduction from your card receipts.
The big disadvantage is that your working capital will reduce.
Will I qualify for an MCA?
If your business accepts card payments, and takes above the minimum amount required by your chosen provider, you have a great chance of being approved.
If you meet the requirement in this area and can prove profitability and provide the required documents, there is a good chance we can help.
How much does an MCA cost?
A merchant cash advance costs between 7p and 35p for every pound borrowed in most cases.
The cost is decided by the factor rate, rather than an interest rate. As an example, a lender may offer you a cash advance at a factor rate of 1.15. This means that for every £1 that you borrow, you must repay £1.15.
This is a simple way of borrowing compared to facilities that charge daily interest on an ever changing balance.
What can it be used for?
The funds raised can be used for almost any purpose. Common uses include:
- Funding business operations
- Funding business growth
- Payroll costs
- Purchasing stock
- Paying a tax or VAT bill
- Purchasing new equipment or machinery as a form of equipment finance
How much can I borrow?
Merchant cash advances are usually offered for amounts between £3,000 to £300,000.
The amount available to you will depend on your monthly card payments, your business and your personal circumstances.
The key to deciding how much you can borrow is your monthly card receipts. Your maximum borrowing is likely to be between 120-150% of this figure.
What are the benefits?
The main benefits of an MCA are:
- They’re a very simple way to borrow money and require very little management as repayments are taken automatically on a daily basis.
- The cost of borrowing is very easy to understand compared to other types of business finance.
- Funds can be released very quickly, with some providers able to make an offer within 24 hours of your application being submitted.
- Underwriting is less strict than unsecured business loans as the focus is on your card receipts rather than credit history and accounts.
What are the disadvantages?
The disadvantages are:
- If you repay the facility early, you won’t save any money.
- If you use a little known card terminal provider, you may have to switch providers (although this isn’t always the case).
Frequently Asked Questions
Yes, there is a good chance you’ll still qualify even if you have bad credit. This is because MCA providers focus more on affordability and card receipts than your credit history.
This is due to the fact that repayments are deducted at source automatically, meaning there is no onus on you to manage regular large monthly payments each month.
You can get approved within 24 hours, and funds can be released within a few days once you sign your paperwork and return it.
A realistic timescale for completion is 2-5 days on average.
Yes, in some cases you can stay with your current card terminal provider. That said, you may find that this restricts your options and result in you getting a worse deal as a result.
If staying with your current provider is important to you, we will always look to offer an option that allows you to do so, where this is possible.
Equally, if a better deal is available elsewhere, we will give you the choice.
Yes, a sole trader can still get a merchant cash advance. As with any type of business, such as a limited company or partnership, as long as you meet the lenders minimum criteria, you can still qualify.
To apply, you will be asked to provide the following:
- Details of your card receipts
- Business bank statements
- Financial documents such as accounts and management information
No, we can still offer MCA products to non-homeowners as long as you meet the other eligibility criteria.
