Merchant Cash Advance

What is a merchant cash advance?

A merchant cash advance is a type of business finance where the funding is based on monthly card sales. Technically, merchant cash advances are not business loans but a forward purchase of future receivables. In other words, the lender gauges your average monthly income and then advances you a portion of this income before it’s received.

The reason why it’s centred around card sales (not total sales) is that a portion of your future card sales will be taken to repay the cash advance automatically.

How do merchant cash advances work?

Merchant cash advances are often unsecured and paid back within 12 months, though there are some instances of providers with longer terms. The amount of funding available directly relates to the average monthly card sales because this is the source of repayments. Trading history length can also be a factor.

Repayments are daily and automatic, taken from a portion of the card sales. The percentage amount taken from each card payment is typically fixed and pre-agreed. This means that the more you sell, the more you pay back and the faster the advance is cleared.

A merchant cash advance provider will charge you what is known as a ‘factor rate’. Typically, this is between 1.1 and 1.5. If you agree to a factor rate of 1.15 and borrow £10,000, you’ll need to pay back £11,500.

The process from signup to repayment is as follows:

1. Terms agreed (total advance and repayment percentage). You agree on the total amount of the cash advance, the cost of the advance determined by the factor rate, and the percentage of your daily credit and debit card sales used to repay the cash advance (typically between 5% and 15% of your card sales). For example, you may be offered £10,000 at a factor rate of 1.2 with 10% repayments. So £12,000 will need to be repaid by taking 10% of each card sale processed.
2. Make card sales. You take credit and debit from your customers as normal.
3. Automatic repayments are made. The pre-agreed percentage is automatically deducted from your daily card transactions at the point of sale.
4. Receive the remaining sales amount in your account. You receive the remaining money from your card sales in the same timescales as previously. The MCA repayments do not add a delay to your business receiving funds from your card sales.
5. The MCA balance is reduced. The MCA total outstanding is reduced every time you receive a card payment.
6. Repayments Finish. Once the outstanding MCA balance is cleared repayments stop automatically.

Is a merchant cash advance a loan?

No, merchant cash advances are not business loans but a forward purchase of future receivables. This means they are not regulated by the FCA.

The MCA lender is buying a portion of the business’s future card sales at a discount. Instead of repaying a loan amount with interest over a fixed period, an MCA allows a firm to sell a specific amount of its future revenue in exchange for a lump sum. Therefore, they are more similar to invoice factoring than a loan.

As stated above, the other main difference is that their fees are not based on a monthly interest rate but on a factor rate. The repayment process is also automated which is not always the case for a business loan.

What can businesses use a merchant cash advance for?

Merchant cash advances are typically used to provide fast capital for urgent funding requirements, cash flow shortages, short-term expenses and investments including:

• Equipment and machinery
• Unexpected repairs and maintenance
• Marketing and advertising (i.e. Google Ads, Facebook Ads)
• Website development
• Paying VAT
• Inventory (i.e. for seasonal sales)
• Stock
• Cash flow relief (e.g. for wages, supplies, events)

Best merchant cash lenders

You can compare merchant cash advance lenders for UK businesses here. You can check the eligibility requirements and maximum funding available from:

• YouLend
• Liberis
• 365 Finance
• Capify
• Momenta Finance
• Nucleus
• Love Finance

Types of businesses that use merchant cash advances

There is a wide range of industries in the UK that use merchant cash advances, either as their sole form of business finance or in conjunction with longer-term funding solutions. Some examples include:

• Retail: A clothing shop preparing for the holiday season may use an MCA to purchase summer inventory.
• E-commerce: All transactions for an online store are done through card sales, making them a good candidate for an MCA. This may be used to jump on new trends, expand a store, or run a marketing campaign that is expected to drive sales.
• Hospitality: A coastal restaurant which experiences a big swing in seasonal trade and cash flow.

How much does an MCA cost?

The total cost of an MCA is pre-agreed before the loan is transferred and does not depend on how quickly it is paid.

The total cost of the finance is determined by multiplying the total advance amount by the agreed factor rate. For example, if the borrowing approved is £20,000 at a factor rate of 1.2, the amount to repay is £24,000 (of which £4,000 is the cost of the MCA).

What is a factor rate?

The factor rate is a multiplier used to calculate the full repayment amount. This is not like an APR (annual percentage rate) or interest rate, because it bears no relationship to time. Instead, it’s simply a pre-agreed cost of a provider advancing funds to a business.

What are the benefits of merchant cash advances?

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

• High approval rates: MCAs have one the highest approval rates of all business loan types. Approval rates can be as high as 90% for some MCA lenders compared to 62% for traditional business lending.
• Speed of and ease of approval: MCAs can be a quick and easy way to get funding for your business. Unlike traditional loans, you can get approved for an MCA within 24 hours using an online-only application. Funds may arrive within 1-2 business days.
• No collateral or personal guarantees required: MCAs don’t require collateral to be offered and directors don’t need to make personal guarantees which removes the personal liability concerns of traditional loans.
• Ease of application: Unlike traditional lenders, MCA lenders will not require a business plan to be submitted during an application. Instead, they look at card sales data via statement PDFs or via open banking which speeds up the application even more. According to YouLend data, merchants who use open banking in their MCA application are 60% more likely to receive an instant approval decision than those who supply bank statement PDFs.
• Credit ratings are usually irrelevant: As the lender can see your previous card sales, they don’t need to rely on credit ratings.
• Lower risk of default or damage to your credit rating: As repayments are automatically taken from your customers’ card payments there is less risk of defaulting or incurring late payment fees which may damage your credit rating.
• No effect on credit ratings: Unlike traditional business loans, a merchant cash advance can not damage, or improve, your credit rating.
• Proportional repayments: If your business has a slow week with reduced sales, less of the MCA will be repaid. The dynamic nature of repayments can provide better cash flow compared to standard loans which require the same amount each month.
• Simple top-ups: It is simple to apply for ongoing top-ups after you have paid down a large proportion of an existing cash advance.
• More lending available to start-ups: Businesses just 3 months old can get a merchant cash advance if they are generating card sales. In contrast, a business that has traded for less than 12 months would typically struggle to get an unsecured bank loan.

What are the downsides?

• Factor rate fees are often more expensive than conventional business loans: Total repayments tend to be higher overall and spread over a smaller repayment term. This means that monthly payments are relatively high compared to standard business loans.
• Funding limit is restricted by card turnover: It may be possible to get more funding from other types of business loans. Most MCA lenders will not advance more than 2 times your monthly card turnover. If you need a loan that is significantly larger than your card turnover and there is no time pressure, other types of business finance may be a better option.
• No savings are possible by repaying early: As the repayment total is fixed when you take out the merchant cash advance, early repayment will not reduce the interest charged like it would on a standard loan with monthly interest.

Merchant Cash Advance Vs Traditional Business Loan