What Is A Merchant Cash Advance & Should You Get One?

We define what a merchant cash advance is, the benefits and drawbacks, how to get one and how the interest is calculated.

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What is a merchant cash advance?

A merchant cash advance (MCA) is a type of funding that provides businesses with an upfront sum of cash in exchange for a percentage of future sales. MCAs are typically used by businesses that need quick access to capital and can’t qualify for traditional loans.

How does a merchant cash advance work?

A merchant cash advance is not a loan, but rather an advance on future sales. The lender will give you an upfront sum of cash and then collect a percentage of your future credit and debit card sales until the advance is repaid in full.

image source: https://www.merchantloanadvance.co.uk/


What are the benefits of a merchant cash advance?

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

  • Speed: MCAs can be a quick and easy way to get funding for your business. Depending on the lender and application process, you can get approved for a merchant cash advance very quickly – often within 24 hours.
  • Approval Rates: They are also typically easier to qualify for than traditional loans, and can be used for a variety of purposes.
  • Flexibility: Your business only pays back the loan when it receives customer card payments, meaning that repayments are linked to sales, so you can better manage cash flow.
  • Unsecured: Merchant cash advances are a type of unsecured business finance as you don’t need to put forward collateral such as business assets or property.
  • Ease of application: Unlike traditional lenders, merchant cash advance lenders will not require a business plan to be submitted in the application. A lender will look at your sales data instead. If they can access your merchant account statements online you save even more time and hassle submitting supporting documentation.
  • 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: As repayments are automatically taken from your customers’ card payments there is less risk of defaulting and incurring late payment fees.

What are the drawbacks of a merchant cash advance?

  • Fees: The biggest drawback of an MCA is that it can be expensive. The fees and interest rates associated with MCAs can be high, and you could end up paying back significantly more than you borrowed.
  • Limited by current turnover: The amount you can borrow largely be based on your current turnover and not what you hope to make in the future.
  • Lending does not take non-card revenue into account: The amount you can borrow will not take into account the revenue you receive via cash, invoice or BACS transfer (as the lender has no way of taking an automatic cut of those payment methods).

What are the lending criteria for merchant cash advances?

There are a few things lenders will take into account when considering your business for a merchant cash advance:

  • Your card sales: Lenders will want to see that you have a steady stream of credit and debit card sales. This helps them assess your ability to repay the advance.
  • Your time in business: Most lenders will require that you’ve been in business for at least six months to a year before they’ll consider you for an MCA.
  • Business sector: Businesses operating in riskier business sectors will have a lower chance of being approved.
You can see our list of the most popular merchant cash providers here.

How much could I borrow?

The amount you can borrow with a merchant cash advance will depend on your business. Typically, lenders will advance you anywhere from 10% to 50% of your monthly credit and debit card sales.

For example, let’s say you bring in £10,000 per month in credit and debit card sales. If a lender advances you at 20%, you could receive a cash advance of £2,000.

What are the fees and interest rates for merchant cash advances?

Fees are normally split into a flat upfront fee and a small, fixed percentage of daily sales.

The rate you will pay is often given as a factor rate rather than APR. Factor rates generally start at 1.1 and can go as high as 1.5 or more, usually expressed as a decimal number (not a percentage) that multiplies the principal amount of the loan indicated on invoices.

So if you are looking for a £20,000 advance with a factor rate of 1.2 you would pay back £24,000. Crucially, this total does not increase if repayment takes longer than anticipated.

The factor rate is calculated based on several factors including:

  • How much your business needs to borrow
  • How long your business has been trading
  • Your average monthly card payment income and how these fluctuate over time (benchmarked by the industry).
  • The projected time it will take to pay back in the loan in full
  • How likely they think a default on the loan is

How is a factor rate different to APR?

The main difference between a factor rate and APR is that the former does not increase if you take longer to repay the advance than originally agreed.

With an APR product such as a business credit card or term loan, if you only make minimum repayments each month, you will end up paying much more back than you borrowed because of the interest that is applied to the outstanding balance.

A factor of 1.2 is not the equivalent of a 20% APR loan as some would expect. For example,

  • Loan amount: £10,000
  • Factor rate: 1.2
  • Total repayment amount: £5,000 x 1.2 = £12,000
  • APR = 35%

How to apply for a merchant cash advance

Applying for a merchant cash advance is typically a relatively simple process. Most lenders will require you to fill out an application, which can be done online or in person.

Once you’ve submitted your application, the lender will review your business’s financial information and make a decision. If you’re approved, you’ll typically receive the funds within a few days and sometimes within 24 hours.

When you’re applying for a merchant cash advance, there are a few things you should keep in mind:

  • Make sure you understand the terms and conditions: Before you apply for an MCA, make sure you understand the interest rates, fees, and repayment terms.
  • Be honest about your business’s financial situation: Lenders will review your business’s financial information to make a decision, so it’s important to be honest about your business’s revenue and expenses as the details will be checked in your merchant card statements.
  • Read the fine print: Make sure you read the entire contract before you sign it.
  • Get everything in writing: Once you’ve been approved for an MCA, make sure you get everything in writing. This will help you avoid any misunderstandings later on.

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