An introduction to merchant cash advance
What is a merchant cash advance?
There’s a great British saying, ‘horses for courses’ which loosely translates as different people are suited to different things, and this is a truism when it comes to commercial finance too.
For companies that are asset-rich or which invoice regularly, there is a wide range of funding options, but for small and medium-sized enterprises (SMEs) that rely on ad hoc or seasonal customer payments a merchant cash advance – also known as a business cash advance – can provide a valuable type of borrowing.
Aimed at businesses or organisations which take payments via a card terminal, a merchant cash advance enables a company to borrow a lump sum and repay a small percentage each time a customer pays by card. The lender works directly with the card payment system to see how much money is coming into the business account and takes a percentage as funds are received.
What are the advantages of a merchant cash advance?
A merchant cash advance is an unsecured business finance solution that can be used to quickly raise funds of between £5,000-£300,000, often within 24 hours. Perhaps most importantly, particularly for small or seasonal businesses, there is minimal need for a detailed examination of a business’s accounts or a credit check.
The amount which can be borrowed using a merchant cash advance will depend on your average turnover, typically up to 100-125 per cent of monthly card takings, and how much the lender believes a business can afford to repay. The application process is much simpler than a traditional bank loan and any business which has been trading for at least 6-12 months and receives payment via a card terminal can usually obtain a merchant cash advance.
As with many types of business loan, the funds borrowed can be used in any way to grow your business – perhaps to cover an investment in your business equipment or premises, cover overheads during fluctuating seasonal income or to fund a major marketing or promotional campaign.
Repayments of a merchant cash advance reflect the daily ups and downs of a business and this can be reassuring if there are quiet periods as there is no pressure to cover a monthly minimum payment as with most types of business loan.
Additionally, as repayment is taken automatically as a transaction occurs, there is no risk of late payment charges – the more a business generates, the quicker the loan is repaid, typically between six and 12 months. A merchant cash advance can enable a business to manage cashflow more easily and means its owners spend less time organising this aspect of its finances.
What are the disadvantages of a merchant cash advantage?
While there are no real disadvantages to a merchant cash advance, it’s important to understand that this type of borrowing is a financial commitment and the loan will need to be repaid on the basis agreed.
It’s also important to be realistic about the amount a company hopes to borrow, which needs to at least be in line with turnover, and that the business must predominantly take its payments via a card terminal rather than cash, bank transfers or other online payment gateways.
Who is suitable for a merchant cash advance?
In theory, any company which takes regular card payments each month and has around six months of trading records using a card payment terminal could be eligible for a merchant cash advance.
In particular, leisure and hospitality businesses which see seasonal peaks of activity including restaurants and eateries are well-suited to this type of borrowing. Similarly, retail shops and hairdressers which take small, frequent payments via a card payment terminal would be able to access a business cash advance which may help them to invest in stock or equipment.
What can I spend a merchant cash advance on?
A merchant cash advance can be spent on a wide range of business needs, but these often include the following expenses:
• Pay employees or suppliers to manage cashflow
• Buy equipment or vehicles to grow your business
• Launch new products or services, or open a new branch
• Deliver a marketing campaign to advertise or promote your business
• Invest in business premises
How is a merchant cash advance repaid?
A merchant cash advance or business cash advance does not attract interest or have an APR. Instead, an all-inclusive charge is applied which never changes until the loan is repaid.
