Merchant Cash Advances – key details and use case scenarios - Image

Merchant Cash Advances – key details and use case scenarios

To coincide with the launch of Touch Financial’s services expanding to include merchant cash advances, we’ve compiled useful information and examples of how merchant cash advances can benefit your business’ operations.

What are merchant cash advances?

A merchant cash advance acts as a funding facility for businesses which manage card transactions from their customers. Merchant cash advances offer funding amounts which – as Investopedia contributor Jay Willwerth outlines – “are repaid automatically using a percentage of your daily credit card receipts”, thereby “using your business’ future income as collateral” over a set term – usually monthly, until the business has fully reimbursed their funder.

Whereas traditional business loans will usually involve a company paying fixed instalments to their funders each month (barring any unexpected interest rate hikes affecting variable APRs), highlights a key distinction between this facility and a merchant cash advance; instalments paid in the latter arrangement are flexible depending on the level of a business’ monthly revenue, making merchant cash advances “a good fit for businesses with unpredictable revenues, as you’re not committed to a fixed monthly payment”.

Merchant cash advance market growth and adoption

Just as we’ve seen business finance solutions like invoice finance rise in acclaim of late, so too are merchant cash advances widening their presence across a range of sectors. Online payments firm PayPal launched its PayPal Working Capital service in 2013 to provide SMEs with cash advances amongst other solutions, while payments processing organisations such as iPayment Inc. and Worldpay, funding providers like Simply Funding and Australian fintech firm Beyond Inc. announced plans to launch or expand merchant cash advance operations in the last three years.

This exponential rise in demand hasn’t gone unnoticed by the media. Forbes contributor Rohit Arora discussed in August 2017 how merchant cash advances and other alternative lending products have grown far more popular since the 2007-2009 global recession and will likely only continue to do so as major economies like that of the United States grow in strength. For instance, he notes that “small business loan volume is at its highest level in nearly two years” according to Thomson Reuters / PayNet Small Business Lending Index. Indeed, Business Matters now ranks amongst the top reasons for businesses to accept credit card payments this year, while RealBusiness dubbed alternative funders “the go-to for independent businesses in need of assistance when it comes to growth” earlier this month.

How can merchant cash advances help your business?

Having detailed what merchant cash advances are and their continuously rising position within the market, here are some ways in which they can stand to support your business:

  • Flexible, fast cash rewarding business success – Merchant cash advance facilities can serve as a vital countermeasure for businesses operating in the hospitality, fashion retail, automotive servicing and leisure sectors. If your business relies on a card terminal to take payments from customers, then you could receive an advance which is in line with how your business is performing. The process of applying for and securing a merchant cash advance is not as rigorous or complex as a conventional loan, with the speed of approval tending to be much quicker.
  • Credit score in progress – When initially commencing their operations, many smaller firms need time to build their credit score to a favourable enough level for loans and other funding solutions yet simultaneously necessitate funds to ensure their survival. Take a retail business opening its first high street or online branch; once this branch has started to bring in a regular healthy cashflow, it might seem more logical for the business to pursue a merchant cash advance then rather than having to wait for its credit score to rise for a loan or another facility.
  • Update your financial transaction systems – Merchant cash advances might alternatively factor into a business overhauling its transaction methods this year, moving from increasingly outdated payment modes such as cash-in-hand or cheques to accepting credit card for the first time. Since operating card machines can incur additional costs come the end of the fiscal year, any firms opting to do so may feel safer in the knowledge that they’ll have an additional source of funding – effectively a new line of credit – to prevent their bottom line from suffering.
  • An unsecured alternative funding solution – Perhaps the most attractive aspect of merchant cash advances lies in their offering another option to those businesses who’ve explored cashflow solutions like traditional bank loans and overdrafts. Merchant cash advances may appeal to you, particularly if you would rather not put forward collateral. For example, a fledgling construction firm can’t necessarily risk offering any vehicles owned as security at such an early stage in its development, nor a retail firm its stores or office buildings. Instead, then, they can use a merchant cash advance to gain funding and repay this through their credit card systems as opposed to assets which they can’t afford to lose and / or at a later stage may wish to sell onto other businesses.

Find out more

We hope that this guide has at least provided you with a beneficial initial insight into what merchant cash advances entail, recent industry and media coverage as well as their implications for various types of businesses. If you’re interested in exploring our latest cashflow solution or any of our other acclaimed services such as invoice finance or unsecured business loans, get in touch today and one of our consultants will be happy to help find the most suitable facility for your firm.

Apply now and one of our consultants will help to find you the best invoice finance facility for your business, free of charge.

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