A merchant cash advance is a form of unsecured business finance. However, unlike a loan, it typically attracts a set-up fee instead of monthly interest.
Repayment is made from card machine revenues, so is dependent on your turnover. This means you pay more when takings are higher. You also don’t have a set repayment period.
Note that some providers call it a Business Cash Advance or simply a Cash Advance.
How Merchant Cash Advances Work
A merchant cash advance provider will investigate your current revenues from your card terminal machine. (Note you might refer to this as a PDQ, PoS terminal, or Chip and Pin machine.)
If agreement is reached, they will advance an amount to you often equivalent to around a month’s revenue.
Repayments are made at a pre-arranged percentage of future card revenues. You’ll continue to pay until the full amount and any pre-arranged fees are paid back.
The percentage of each card transaction you pay back (the ‘split’) is negotiable. However, it is usually between 10% and 20%.
Three simple steps to accessing a merchant cash advance
Once the necessary documents are gathered and application is processed, you’ll be a step closer to receiving a decision.
3. Receive Your Funds
Your application can be processed and accepted in as little as 24 hours and you’ll receive the lump sum straight into your bank account.
Cash advance costs
Unlike with a business loan, repayment for a merchant cash advance doesn’t have ongoing interest. Instead, typically, funders will add a fee based on the factor rate to the advance amount.
The factor rate is dependent on a number of things including:
How much you need to borrow
The projected pay-back time
The risk factor of your business
Mostly, factor rates vary from around 1% to 1.5%.
So if you are looking for a £10,000 advance with a factor rate of 1.3%, you would pay back £13,000. This doesn’t increase if repayment takes longer than anticipated.
Providers may have additional fees as well depending on their policies and your circumstances. We can talk you through these fees and options.
Advantages and disadvantages
Where your business finances are concerned, it’s always best to consider all options before taking proceeding. Here’s a few of the pros and cons attached to a merchant cash advance.
The approval process is fast, with lenders being able to make a decision and deliver the payment advance within days.
Repayments are based on future sales so if you are expecting a quiet period, you will pay back less. This scalable feature puts you under less pressure as the amount you pay back aligns with your business performance.
Instead of an annual percentage rate, a merchant cash advance charges a small percentage on each card terminal transaction.
If you are unable or do not wish to put forward collateral as security, you don’t have to. Instead, you only need a positive record for a minimum of three months’ trading. Showing high-volume monthly card transactions will usually be sufficient to qualify your application.
If you generally turnover, say, £2,000 per month but want to borrow a higher amount of £5,000, you likely won’t be able to access this higher volume of money.
If you only take some payments via card machine and the rest by cash, invoice or BACS transfer then a merchant cash advance is not going to be the correct solution for your financing needs.
This is always a risk as there just is no guarantee you will consistently turnover the same forecast amount every month, so if you do fall behind on projected sales this will impact your ability to repay the advance.
Merchant cash advance eligibility
Most businesses that use a card machine to process customer sales could be eligible for a merchant cash advance. You normally need to demonstrate a relatively consistent level of monthly cash inflow. Typically, six months of card payment statements will suffice.
If your business has a high volume of monthly card transactions, a cash advance could be a good fit. Typical business types include:
Hotels, restaurants, bars and cafes
Retailers, including online retailers
Hair and beauty salons
Automotive servicing and MOT garages
Some people feel that merchant cash advances are only for small businesses. However, as factor rates have become lower and advances higher, they have become suitable for many larger businesses too.
The minimum card revenues for a cash advance are around £3,000 per month.
There are various ways in which you could use your merchant cash advance, like store improvements, obtaining new equipment, boosting your inventory or cash flow or even managing debt payments. Whatever you need it for, merchant cash advances could be the financing tool for your business.
If your company doesn’t match the eligibility requirements for a merchant cash advance, there are other ways you can finance your business to improve cash flow. Invoice financing is a popular method, involving advancing value of invoices due.
For longer term finance, perhaps to acquire equipment or machinery for your business, asset finance is a good avenue to explore. You could also consider an overdraft replacement.
Get in touch
Call us or fill in our form and one of our expert consultants can help you quickly determine your eligibility for a merchant cash advance and get your application quickly underway.
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