Merchant cash advance

Q: What is a merchant cash advance?

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. With a merchant cash, the lender works directly with your terminal provider (the company that processes your transactions) to see how much revenue you are generating and takes a small percentage according to your repayment plan – and because the lender can view your monthly revenue, they will not require a credit check or need to view your accounts in detail. The repayment percentage is taken ‘at source’ by the lender, so you don’t need to worry about organising payment, allowing you to concentrate on the day-to-day running of your business. Factor rate The total amount repayable to your lender is dependent on the factor rate, a decimalfigure which denotes the additional figure repayable on top of the cash advance.A factor rate of 1.0 would equate to repaying the same amount you borrowed – howevermost factor rates vary from 1.1 to 1.5, meaning you pay back the initial loan amount plusan additional sum. For example, a merchant cash advance of £10,000 borrowed at a factor rate of 1.2 would mean a total repayment of £12,000.The factor rate is set based on the lender’s assessment of the risk involved, withconsideration given to the length of time you’ve been in business, your average monthlycard payment income and the industry you work in.

Quick facts

Amount

Roughly equivalent to what your business receives in an average month (advances are typically between £5,000 and £500,000)

Term

Between 3 months and 5 years

Cost

Factor rates between 1 and 1.5. Typically 10% of your daily card transactions paid back daily.

Speed

24 hours (longer for larger amounts)

Purpose of finance

To ease cash flow

Suitable for

Small to mid-sized businesses who are unable to access more traditional forms of capital (minimum turnover required is typically £50,000)

What is a merchant cash advance?

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.

With a merchant cash, the lender works directly with your terminal provider (the company that processes your transactions) to see how much revenue you are generating and takes a small percentage according to your repayment plan – and because the lender can view your monthly revenue, they will not require a credit check or need to view your accounts in detail. The repayment percentage is taken ‘at source’ by the lender, so you don’t need to worry about organising payment, allowing you to concentrate on the day-to-day running of your business.

Factor rate

The total amount repayable to your lender is dependent on the factor rate, a decimal
figure which denotes the additional figure repayable on top of the cash advance.
A factor rate of 1.0 would equate to repaying the same amount you borrowed – however
most factor rates vary from 1.1 to 1.5, meaning you pay back the initial loan amount plus
an additional sum. For example, a merchant cash advance of £10,000 borrowed at a factor rate of 1.2 would mean a total repayment of £12,000.
The factor rate is set based on the lender’s assessment of the risk involved, with
consideration given to the length of time you’ve been in business, your average monthly
card payment income and the industry you work in.

Is it suitable for an SME?

Merchant cash advances are particularly useful for small businesses, offering a quick and
simple way of accessing additional funds. The sum available is usually roughly equivalent
to your monthly revenue, ranging from £5,000 to £500,000 and repayable over a period of
between three months and five years.

Why choose a merchant cash advance?

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. Aimed at helping businesses to grow, a merchant cash advance is a form of business cash
advance available to you if your company regularly uses a card terminal to process
payments. You receive a lump sum up front and pay it back in monthly instalments based on your revenue – so if your business goes through a quiet period, your repayments will
decrease accordingly.

Pros and cons of a merchant cash advance

Although there are plenty of reasons to apply for a merchant cash advance, it’s important that you’re aware of their limitations to ensure that it’s the right choice for you.
Lenders are cautious when offering merchant cash advances, and the amount they are
willing to loan your business is dependent on your average monthly revenue. If your
business currently operates in a small way and you’re looking for a large up front loan to
expand quickly, you’re unlikely to receive the money you need – lenders are usually willing to offer businesses up to the equivalent of a month’s revenue.
You may also find that your options are limited depending on your card terminal provider. While some lenders work with a variety of terminal providers, others choose only to work with businesses that use a specific provider – and the fewer options you have available to you, the more difficult it will be to find a favourable rate that suits you.

You should also be wary of applying for a merchant cash advance if your business takes
payment via methods other than credit and debit cards. Merchant cash advances are
repaid by taking a percentage of your monthly card terminal income, so if you regularly
receive payment via bank transfer, invoice or cash you may find that there are other
finance options that will be more suited to your needs.

Have you also considered?

You might also want to look at supplier finance (i.e. supply chain finance).
Business cash advances are more expensive than bank loans.
Perhaps the most popular type of business cash advance is the merchant cash advance. You might also want to look at supply chain finance.

It could also be a good option if you find you’re not eligible for a bank loan, but you don’t want to part with company equity.