Merchant cash advance

Quick facts

A merchant cash advance is a type of business cash advance. It is designed with retail businesses in mind. If your business takes regular payments through a card terminal, you can use your recent takings as the basis for this kind of loan.

A merchant cash advance uses your card terminal to ‘secure’ lending and get cash fast. You don’t need to have valuable assets but you do need a good volume of card transactions every month. The lender takes payments as a proportion of your revenue. This means that when things are going well, you pay more back each month, but if your business is going through a lean period you pay a smaller amount.

With a merchant cash advance, the lender works directly with your terminal provider (i.e. the company that processes transactions for you) so they can see how much money is flowing through your business. That means that unlike other types of lending, the lender does not need to carry out credit checks or scrutinise your accounts. The percentage the lender takes for repayments is never in your business’s bank account, but instead is ‘taken at source’ – in the same way that most people pay income tax.

Factor rate

The total cost of a merchant cash advance (i.e. the amount you pay back to the lender) depends on the factor rate. This is a decimal figure (not a percentage) used to calculate how much the advance will cost you. For example, if you borrowed $10,000 at a factor rate of 1.2 for a 12-month term, you’d pay back a total of $12,000. The calculation is simply $10,000 x 1.2, which gives you $12,000.

Although this calculation looks like it’s based on a percentage rate of 0.2%, it’s not! With an merchant cash advance all of the interest is charged to the principal when you take out the advance. This is the key difference between factor rates and interest rates. It’s why the merchant cash advance isn’t priced using APR – APR is used for financing where interest accrues on the principal loan amount, which will get smaller and smaller as you make successive payments.

Lenders will vary the factor rate according to their assessment of your business, the industry you’re in and their own risk assessment. Typical factor rates are between 1.1 and 1.5.

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