Merchant cash advance

It may be relatively new to the business world, but the merchant cash advance is already a prime source of funding for consumer-facing businesses.

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    Alastair Woods

    Page written by Alastair Woods. Last reviewed on July 12, 2024. Next review due March 1, 2025.

    Fast, flexible, and scalable, the merchant cash advance is a favourite for South African hospitality, retail, and leisure businesses. Using your card payment terminal to access unsecured lending, it’s an ideal solution for businesses with few assets, but a good volume of daily card transactions. With no need to juggle monthly cashflow, repayment is made ‘at source’ as a percentage of your card revenue. Pay more as business grows, pay less if things are slow. The perfect mix for many SMEs.

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      What is a merchant cash advance?

      A merchant cash advance (MCA) is flexible business funding that unlocks future income to provide immediate cash today. These loans may also be called a business cash advance. With an MCA, the lender provides a lump sum that’s repaid from customer card receipts. Repayments are made on a daily, weekly, or monthly basis and as a fixed percentage of card payment receipts.      

      Merchant cash advances can be easier to obtain than traditional funding options and they’re a good alternative for businesses with few assets, or limited credit history. Businesses that have been rejected for other types of funding may still qualify for a merchant cash advance.

      Suitable for businesses with a high volume of card payments, merchant cash advances are used by many types of industry.  Sole traders, partnerships and limited companies are welcome to apply.

      How do they work?

      Any business that receives payment via a card terminal may qualify for an MCA. Because the lender works with the card terminal provider, (the company that processes your transactions), they see the volume of card payments your business receives. The lender uses this information to calculate the sum they will lend and a plan to pay back the loan.

      Because the loan and repayment plan are based on your trading pattern and how much money your business makes, merchant cash advances adapt to the way your business operates. The percentage of customer receipts you pay to the lender does not change, but the sum you repay daily, weekly, or monthly, does. It will fluctuate to match your card payment income. (This flexibility can work particularly well for businesses with variable or seasonal income).

      By design, merchant cash advances make repayment simple and you never have to worry about sending a remittance. Loan repayments are taken ‘at source’, which means they are sent directly to the lender by your card terminal provider.   

      How much you can borrow will depend on factors such as your card turnover and the repayment sum the lender is confident you can comfortably afford.

      Andrea Reynolds, Swoop’s CEO & Co-Founder
      Andrea Reynolds
      Swoop’s CEO & Co-Founder

      A word from Andrea

      "With a merchant cash advance (MCA) you can unlock future income to provide immediate cash. The lender provides a lump sum that’s repaid from customer card receipts. Repayments are made on a daily, weekly, or monthly basis and as a fixed percentage of card payment receipts."

      Is a merchant cash advance a loan?

      Yes and no. Technically, all types of borrowing are a loan, but merchant cash advances differ from standard business loans in several ways.

      Firstly, a merchant cash advance is unsecured. It does not require collateral, or assets to back the loan. You do not need to be a homeowner. The money is lent to your business and you pay it back as a percentage of your card payment income. The volume of your card payments and the amount of money your business makes are what qualify you for the loan and how much the lender will advance to you.

      Secondly, merchant cash advances adapt to your business. As you grow, you repay faster. During  lulls, you repay slower. The time it takes to clear the loan is determined by the performance of your business. However, like other loans, an MCA has a fixed ‘sunset’ point – which is the final date for full repayment of the loan. This can be short – three months, or long – three years.

      Thirdly, standard business loans may incur hefty late charges or penalties for early repayment. A merchant cash advance does not. Because repayments are taken at source, it is not possible to be late, so there can be no late charges. You also repay the loan based on trading, so if your business grows rapidly, you pay the loan back sooner. Early repayment does not incur a penalty charge.

      What can I use a merchant cash advance for?

      You can use a merchant cash advance for wide range of legitimate business purposes, including:

      • Purchase of stock
      • Premises refit or expansion
      • Large order funding
      • Regular cashflow
      • Paying VAT or tax bills
      • Marketing and new business programmes
      • Purchase of plant or office equipment

      In short, if your business needs funds to grow, a merchant cash advance could work for you.

      Examples business types that could utilise a merchant cash advance:

      Even if your card turnover has dropped because of the COVID-19 pandemic, you can still apply for an MCA. Use the loan to pay off debts, replace stock, refit your premises to be COVID-19 secure, drive marketing and promotions, or any other business purpose.

      How much does an MCA cost?

      The cost of an MCA is determined by a mix of factors, such as your industry sector, business credit rating, volume of card receipts, and your turnover. The cost is called the factor rate and it is set at a fixed rate per R1 borrowed. Typical factor rates vary from 7p to 35p per R1 you borrow. (These variables would be expressed as factor rates of 1.07 and 1.35).

      Example: R1,000 borrowed at a factor rate of 1.2 (20p per R1 borrowed), means you repay R1,200.

      The factor rate is set at the time the loan is made. It does not rise or reduce as the loan is repaid. Nor does it reduce if the loan is paid back sooner than expected. Contact us today to receive a rate quote tailored to your specific business needs.

      What is a factor rate?

      The factor rate is the fee charged by the merchant cash advance provider. Unlike an interest charge, that may be variable, the factor rate is set at a fixed pennies per pound borrowed. Borrow R1 at a factor rate of 1.35 and you will repay R1.35. Typical factor rates are 7c to 35c per rand borrowed.

      Some business loans (for example a bank overdraft) charge interest according to the sum outstanding. The interest paid each month may be based on a variable rate, meaning it can go up or down depending on the bank base rate set by the South African Reserve Bank. Merchant cash advances do away with that volatility. The fee is set at the start of the loan and it does not fluctuate. You borrow a lump sum and then pay that back incrementally, plus the fee, via your customer card payments.

      Merchant cash advance calculator

      Calculate your merchant cash advance repayments using the calculator below. Enter the amount you would like to borrow, the factor rate, and the amount your business takes in card sales each month to see an example repayment amount.

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      This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.

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      Repaid in (approx.)

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      What are the benefits of merchant cash advances?

      Merchant cash advances are flexible and scalable. They adapt to the growth and operating pattern of your business. You pay back what your business can afford based on your customer card income. Pay more when business is going well, pay less if things slow down.

      Merchant cash advances may be secured without collateral or a deep review of your accounts. They are a good option for businesses with limited credit history or few to no hard assets.

      Unlike many other forms of business funding, an MCA can often be secured quickly. In some cases, a loan offer can be made within 24 hours of application.

      Repayments are taken at source. There’s no need to waste time juggling your cashflow to meet an upcoming payment. You concentrate on your business and you let the loan take care of itself.

      There are no hidden fees. The factor rate, (cost of the loan), is set at the start. You know what you pay from the moment the loan is made.

      What are the downsides?

      There are few disadvantages to a merchant cash advance. However, the cost may be higher than a standard business loan. The fee, (factor rate) is set at the start and it is based on your business operation at the time the loan is made. If your business becomes stronger through rapid growth, that will not reduce the fee you pay.

      Additionally, because a merchant cash advance is based on card terminal receipts, businesses that trade in only cash, cheque, or bank transfers will not qualify. 

      Lastly, the lender will offer a loan that reflects your card payments turnover. Most lenders will offer a loan 1-2 times monthly card turnover.  (some may go higher). If you need a loan that is significantly larger than your card turnover, an MCA is probably not the choice for you.

      Are merchant cash advances legal?

      Yes. They are a legitimate form of business finance used by thousands of companies in the South Africa. Swoop works with the best MCA providers to offer optimal solutions for all your business funding needs.

      Can I repay the cash advance early?

      Yes. There are no penalties for early repayment. However, you will make no financial savings by doing so. The fee you pay, (the factor rate) is set at the start of the loan. It is fixed and it does not go down even if you pay the loan back sooner than expected.

      If your business has accrued surplus funds that would allow early repayment, there may be better ways to deploy that cash – such as an expansion, or a business acquisition. Swoop has a range of financial products to help you get the best from surplus funds. Please contact us to discuss different ways to make your money make more money.

      Do cash advances hurt my credit score?

      Taking out a cash advance has no direct impact on your credit score, but it can affect it indirectly in various ways. The lender makes their loan decision based on your card payment turnover, business credit rating, length of time in business and the repayment sum they think your business can afford. The lender may also take a soft look at your personal credit history, but that should not hurt your credit score. Only where the lender has concerns about your ability to meet your obligations may they request a hard credit check. That could impact your credit score. 

      Can I get one with bad credit?

      Yes. Because merchant cash advances are granted based on business performance and card turnover, it is possible for operators with bad personal credit to obtain an MCA. Business owners who have been rejected for other types of funding may still qualify for a merchant cash advance.

      Bear in mind that an MCA is unsecured borrowing. The lender will base their offer on the level of risk involved. The higher the risk, the lower the loan size and the  higher the fee (factor rate). Lenders may decline to make an offer to some applicants if their credit score is particularly adverse.

      Can I get one without a credit check?

      Yes. Lenders place more value on the volume of card customer receipts, the trading and credit history of the business and the ability of the business to make repayments than they do on personal credit. However, as an MCA is unsecured, many lenders will still conduct a ‘soft’ review of the applicant’s credit rating. In some cases, if there are concerns about an applicant’s ability to meet their obligations, lenders may request a hard credit check.

      Businesses that are unable to obtain a merchant cash advance – for example, due to limited trading history or a low volume of  card payments – may still be able to secure funding from other sources. Swoop can offer a wide range of financial options – from equity to loans to credit lines – to suit almost any type of business.

      Can I get one without bank statements?

      Probably not. Although lenders will look at your card payments volume and history first, you must expect to show some financial records. If not bank statements, then filed accounts, or a balance sheet and perhaps your business or tax returns. Although different lenders have slightly different criteria, they are all seeking to identify risk. The more information they have about your business, the more accurate their offer will be.

      For sole traders or new businesses, lenders will usually ask to see bank statements. For limited companies, they will ask for a copy of your most recent accounts, as well as your current year’s accounts to date. Having a business bank account and the ability to produce balance sheets will be a bonus. If your company is new, or it doesn’t have audited accounts, your personal tax returns may be used to help calculate the level of risk your business may present.

      Can I get out of a merchant cash advance?

      Yes. You can exit an MCA at any time by paying off the remaining advance and fee. There are no penalties for early repayment, but the fee you agreed to at the start of the loan must still be paid in full. There is no discount for repaying sooner than expected.

      If you do not have the surplus funds to repay a merchant cash advance, but you still wish to exit the loan, you could do so by other using methods  – such as obtaining a term loan from a new lender, raising new equity to discharge the MCA, or expanding your business to repay the loan from increased revenues. Speak to us to better understand the range of funding options available and to find the best way to achieve your funding goals.

      Can I get a same-day merchant cash advance?

      Almost. Some lenders can make an offer within 24 hours. If your card payments volume, business profitability and business credit rating are strong, it is possible to receive an MCA offer within one day of application and the funds placed into your account soon thereafter. Note, however, that although obtaining a merchant cash advance is often faster than other lending choices, in most cases, lenders will need to conduct full risk assessment, which includes contacting your card terminal provider.

      What are the interest rates?

      An MCA does not have a regular interest rate or APR. Instead, the borrower pays a flat fee. This is called the factor rate. It is a fixed price of pennies per pound borrowed. (For example, 35c per R1 borrowed – or a factor rate of 1.35). The fee is set on the total lent – so a loan of R5,000 at 1.20 factor rate would generate R1,000 in fees for a total of R6,000 to be repaid.

      Because repayment of the loan is based on customer card payments, the time to repay the loan can vary considerably. Repayments are set as a percentage of each card transaction – for example 10%. Increased card receipts will trigger a larger repayment to the loan, which will pay the loan off faster. Less card receipts will generate a smaller repayment to the loan and extend the time it takes to pay down the debt.

      Can I get one as a sole trader?

      Yes. If they meet the minimum criteria, sole traders, partnerships, and limited companies can all apply. You do not need to be a homeowner.

      What happens if I default on a merchant cash advance?

      With any loan, when a borrower defaults, the lender may pursue other remedies to retrieve their money. A merchant cash advance is no different. Should the lender take action to salvage their loss, the implications for the borrower could include civil law suit, loss of property, bad credit rating, or even bankruptcy. In cases where a borrower has been asked to provide a personal guarantee, (such as with a limited company), it should be expected that the lender will automatically move to take possession of the borrower’s pledged assets to satisfy the loan.

      Borrowers should ensure they can repay any loan before accepting an offer. If you have doubts about your ability to meet your obligations, Swoop may be able to provide you with an alternative form of funding, such as equity participation.

      Can I keep my existing card machine provider?

      Usually, yes you can. Most lenders will attempt to work with your existing provider. However, some providers restrict the lenders you can use. In such cases, you may have to swap your current terminal for one from a new provider to qualify for the loan.

      Do I qualify for a merchant cash advance?

      If your business accepts card payments from customers, and you can meet the minimum card payments volume set by the lender, then the answer is yes.

      Essential requirements:

      • Minimum volume of card payments
      • Enough profitability to prove you can repay the loan
      • Bank statements, or other financial documentation, such as audited accounts

      There are many merchant cash advance providers. It can be slow to reach them one by one. Let Swoop do the hard work for you. Use our lender network to find the best MCA or other type of funding for all your business needs.

      Apply now.

      Written by

      Alastair Woods

      Alastair is South African and has a depth of experience in small business financing and strategy. He has led the launch and development of several successful ventures related to fintech, biotech and agriculture. Alastair studied economics and finance at the University of Cape Town, and then went on to complete his Masters at the University of Edinburgh.

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