August 11, 2022

What is a Merchant Cash Advance?

A Merchant Cash Advance can also be known as a Business Cash Advance

It is a type of business finance designed to enable SME’s to obtain access to flexible finance.

Who is Eligible for a Marchant Cash Advance?

Businesses in

  • Retail
  • E-commerce
  • Direct to consumer
  • Any business that takes payment via a card terminal or virtual payment processors.

The merchant cash advance lender takes a percentage of the business’s terminal sales to repay the finance, rather than taking a fixed monthly repayment.

Essentially, the lender is advancing the future card sales of the business, allowing the business to invest the funding into working capital for increased stock purchases or additional capital to help refurbish the business. This type of business finance allows the business to use their main income stream to leverage finance, rather than using business assets or the business owner’s personal assets. 

What are the Repayment Terms for a Merchant Cash Advance?

The repayment terms of the merchant cash advance are dictated by the lender. They will agree a percentage of the daily card revenue and a total repayable amount when issuing the funding proposal to the business. The percentage is typically fixed until the advance has been fully repaid, therefore the percentage of card revenue is only taken when the business is trading and repayment is taken in line with the revenue of the business.

For example, if the business is closed two days a week, repayment won’t be taken, as you only repay when you trade, this is an advantage for businesses who experience seasonality as when business is slow, the business pays less. 

What is an Example of a Merchant Cash Advance?

A retail shop has a monthly turnover of £20,000 on average via their card terminal, the business borrowed 100% of their monthly revenue and has agreed to repay 10% of their terminal sales, which is £2,000 a month until the advance is fully repaid (the amount payable per month can change if the business takes more per month)

Usually, advances have repayment periods of between 5-12 months, the percentage agreed with the lender is an indicator of the repayment term. 

How Much is a Business Eligible for with a Merchant Cash Advance?

Merchant Cash Advances are available to all types of businesses, limited companies, sole traders and partnerships. The most common minimum criteria is:

  • 6 months of turnover via a card terminal 
  • Minimum monthly turnover of £3,000 via any card terminal
  • No merchant cash advances already in place (unless they can be refinanced) 

Typically, lenders will advance between 100 percent- 150 percent of the average monthly turnover via the card terminal. This means if the average taken monthly via the card terminal over the last 12 months was £10,000 then the business could qualify for an advance between £10,000 and £15,000. The affordability metric is different per lender and based on the overall profile of the business. 

What are the Advantages of a Merchant Cash Advance?

As merchant cash advances can be used by a variety of businesses, whether a business is based purely online or a physical retail store there are several advantages, such as:  

  • Transparency: All costs are agreed upfront, there are no fixed monthly repayments or fixed APR’s. There is also no requirement for asset security from the business or the business owner. 
  • Speed: Applications are typically processed within 48 hours. Most lenders only require the last six months of card terminal statements and business bank statements. 
  • Flexibility: Repayments are taken in line with the business revenue and additional advances can be taken once half of the initial advances has been repaid, therefore funding can grow inline with business revenue. Additionally, Merchant Cash Advances can open up a new finance line alongside other traditional methods such as asset finance and business loans. 

What are the Disadvantages of a Merchant Cash Advance?

There are very few negatives for advances, however there are limitations which are key to understand when making a decision on the right type of finance for your business: 

  • Advances can only be used for business that process payments via a card terminal, whether that’s a physical machine or an online payment processor. 
  • Some lenders are only able to work with certain terminal providers for advances, thus some lenders will require the business to change their terminal provider to be able to lend to the business. 
  • It is important to remember that if the business takes cash sales, bank transfers or other methods of online payments most lenders won’t take these into account when assessing how much they can lend. 

Merchant Cash Advanced Compared to a Business Loan:

  • The advanced is assessed predominantly based on the card terminal sales and predicted future revenue. Compared to a business loan which is assessed on the financial accounts, bank statements and credit information.
  • There are lower initial requirements when being reviewed for a merchant cash advance.  
  • For the repayment of a merchant cash advance, the lender typically sets up a trust account in the business’s name, the business owner then changes their card terminal provider to pay into the trust account where the agreed percentage of revenue is taken.
  • The lender is taking the repayment at the source, once the percentage has been taken the additional capital is automatically transferred into the business bank account. This process doesn’t take any additional time for funds to be settled into the business bank account as it is an automatic process. 
  • You don’t need to worry about meeting a fixed monthly repayment as you do with a business loan, which gives you the ability to concentrate of the day-today running of the business. 

Merchant Cash Advances can help businesses access finance quickly and transparently when faced with unforeseen challenges such as ever-changing working capital constraints or increased bills. They are a great option for businesses that operate seasonally, and could be a game changing product for seasonal retail businesses in the current economic climate. Provide is happy to help you go over your finance options if you think a Merchant Cash Advance might be right for your business.

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