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what is merchant cash advance?
An unsecured business loan is a type of business finance that allows a company to borrow money without using a specific business asset, such as property or equipment, as security for the loan. Unsecured business loans can be used for purposes such as working capital, business expansion, purchasing stock, equipment, marketing, recruitment and managing cash flow. The lender will typically assess factors such as the business's financial position, trading history, affordability and credit profile when considering an application.
Important Points to Remember:
- Funding Based on Card Sales - Providers typically assess your card transaction history and business performance to determine how much funding may be available.
- Repayments Linked to Sales - Repayments are generally collected as an agreed percentage of eligible future card transactions, so the amount paid can vary with sales.
- Flexible Use of Funds - Funding can help with working capital, stock purchases, equipment, marketing and other eligible business expenses.
- Costs and Eligibility Vary - The total repayment, fees and eligibility requirements depend on the provider and agreement. Review the full cost before accepting an offer.
How Does a Merchant Cash Advance Work?
A merchant cash advance provides funding in exchange for an agreed percentage of your future card sales. The repayment structure is based on your business's card transaction activity rather than a traditional fixed monthly payment.
Apply Based on Your Card Sales
Providers assess your recent card sales, trading history and business performance to determine whether an MCA is suitable and how much funding may be available.
Receive Your Funding
Once your application is assessed and an offer is agreed, the funds can be provided to your business. The amount available depends on your circumstances and the provider's criteria.
Repay Through Future Card Sales
Repayments are generally collected as an agreed percentage of your eligible card transactions. This means you don't necessarily make the same fixed repayment amount each month.
What Happens When Sales Change?
If your card sales increase, the amount collected towards repayment may also increase. If sales are lower, the amount collected may decrease, allowing repayments to move more closely with your trading activity.
What Are the Benefits of a Merchant Cash Advance?
Flexible Repayments
Fast Access to Funding
No Traditional Asset Security
Repayments Linked to Card Sales
What Businesses Can Use Merchant Cash Advance?
A merchant cash advance can suit a range of businesses that regularly accept debit and credit card payments. From retail shops and restaurants to online stores and service providers, eligible businesses can use this funding to manage cash flow, cover operating expenses or support growth.
Merchant Cash Advance may be suitable for businesses in industries such as:
- Retail Businesses - Shops and retailers that regularly accept debit and credit card payments may use a merchant cash advance to fund inventory, manage seasonal demand or cover day-to-day expenses.
- Restaurants and Cafés - Restaurants, cafés and takeaway businesses with consistent card transactions may use an MCA to manage cash flow, purchase supplies or cover essential operating costs.
- Hospitality Businesses - Hotels, pubs and other hospitality businesses that process regular card payments may consider an MCA to manage seasonal fluctuations, maintain operations or fund business improvements.
- E-commerce Businesses - Online retailers with regular card payment transactions may use merchant cash advances to purchase stock, support marketing campaigns or meet growing order demand, subject to provider eligibility criteria.
- Service Businesses That Accept Card Payments - Salons, gyms and other service-based businesses that receive regular card payments may consider an MCA to cover operating expenses, purchase equipment or support business growth.
How Much Does a Merchant Cash Advance Cost?
The cost of a merchant cash advance depends on the amount you receive, the agreed factor rate and any applicable fees. Understanding the total repayment and overall cost can help you compare providers and decide whether an MCA is right for your business.
- What Is a Factor Rate? - A factor rate is a multiplier used to calculate the total amount repayable on a merchant cash advance. For example, a £20,000 advance with a factor rate of 1.2 would result in a total repayment of £24,000.
- How Is the Total Repayment Calculated? - The total repayment is calculated by multiplying the advance amount by the agreed factor rate. In this example, £20,000 × 1.2 = £24,000, meaning the cost of funding is £4,000 before any additional fees.
- Is There an APR on a Merchant Cash Advance? - Merchant cash advances often use factor rates rather than traditional interest rates. However, the absence of a stated APR does not mean funding is cheaper, so compare the total repayment, fees and effective cost of finance.
- Are There Additional Fees? - Some providers may charge arrangement, administration or other fees depending on the agreement. Before accepting an offer, check all applicable charges, the total repayment amount and any terms that could increase the overall cost.
How to Apply for a Merchant Cash Advance
Tell Us About Your Business
Start by sharing some basic information about your business, including your industry, trading history and funding requirements.
Provide Your Information
Provide the relevant business and card sales information needed to assess your application and determine the funding available to you.
Review Your Options
Once your application has been assessed, review the available funding options, repayment structure, total cost and applicable terms before making a decision.
Receive Your Funding
After accepting an offer and completing the required agreement, the approved funds can be provided to your business according to the provider's terms.
Merchant Cash Advance Vs Business Loans
Feature
Merchant Cash Advance
Business Loan
Repayments
Generally linked to an agreed percentage of eligible card sales.
Usually based on fixed repayments agreed at the start of the loan.
Cost
Often calculated using a factor rate and the agreed repayment amount.
Usually charged through an interest rate, fees or both.
Security
May not require traditional asset security, depending on the provider.
May be secured or unsecured depending on the lender and loan.
Funding Amount
Typically influenced by your card sales and business performance.
Usually based on factors such as revenue, affordability, credit history and the lender's criteria.
Repayment Flexibility
Repayments can vary as your eligible card sales change.
Repayments are generally fixed according to the agreed repayment schedule.
Best Suited For
Businesses with regular card transactions that need flexible working capital.
Businesses looking for a structured amount of funding with predictable repayments.
Alternatives to Merchant Cash Advance
An unsecured business loan isn't the only way to fund a business. Depending on your funding requirements, financial position and eligibility, other forms of business finance may be worth considering.
FAQs regarding Merchant Cash Advance.
A merchant cash advance provides businesses with funding in exchange for an agreed percentage of future card sales. It can provide working capital without the fixed repayment structure of a traditional business loan.
An MCA provider assesses your business and card sales before offering an agreed amount of funding. Repayments are generally collected as a percentage of eligible future card transactions.
The amount you can receive depends on factors such as your card sales, trading history, business performance and the provider's lending criteria. Each application is assessed individually.
The cost varies between providers and depends on the amount of funding and agreed repayment terms. Your offer should clearly explain the total repayment amount, factor rate and any applicable fees.
A factor rate is a multiplier used to calculate the total amount you repay on some merchant cash advances. For example, a £20,000 advance with a 1.2 factor rate would result in £24,000 in total repayment.
A merchant cash advance is structured differently from a traditional business loan. Rather than charging interest on a fixed loan balance, the provider typically purchases an agreed amount of your future card receivables.
Bad credit does not necessarily prevent you from applying for a merchant cash advance. Providers may consider factors such as your card sales, trading history and overall business performance alongside your credit profile.
Funding times vary between providers and depend on your application, documentation and assessment. Some providers can make funds available quickly once an application has been approved and the agreement completed.
This depends on the provider and how they assess your application. Some providers may perform a credit check, so it's important to ask whether the application involves a hard or soft credit search before applying.
The regulatory position can depend on the structure of the agreement and the provider involved. Businesses should check the provider's regulatory status and understand the terms and protections that apply before accepting an MCA.
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