What is a merchant cash advance and how does it work?

Understanding the merchant cash advance process

Merchant cash advances (MCAs) use the value of future card sales to provide borrowing businesses with a lump sum of cash. You may be eligible if your business regularly takes a high volume of debit or credit card payments.

This form of alternative finance is commonly used by retailers, but also by the hospitality and leisure sectors. That’s because it’s scalable and doesn’t increase a company’s debt load as repayments are calculated as a fixed percentage of the volume of card sales.

A merchant cash advance may also be a good option for businesses with a poor credit record or for those just starting up. It offers an effective alternative to traditional business bank lending, where eligibility typically relies on a long trading history or good credit rating.

How do merchant cash advances work?

When you apply for a merchant cash advance, the lender approaches your payment service provider to establish how much revenue is generated from debit and credit card payments, and whether there’s a pattern of payments during the month.

This allows the lender to determine the size of the loan they’re willing to sanction and to develop a repayment plan. Your repayments are calculated as a proportion of your card revenue so you pay back the agreed percentage regardless of whether card sales drop or increase, which helps you budget more effectively and control cash flow.

Furthermore, repayments are made directly by the company that provides your card terminal so you don’t need to think about repaying or worry about making payments late.

What are the advantages and disadvantages of merchant cash advances

Advantages

• Flexible repayment plans: repayments are made in line with business performance so if card sales are lower than expected at any time your repayment is also lower
• No security required: MCAs don’t require collateral to be provided so can be a viable option for businesses with few assets
• Speed of access: they can be accessed quickly - an important consideration for businesses that can’t bridge the financial gap if trade slows

Disadvantages

• Higher interest rates: being a short-term funding solution, MCAs can be more expensive than traditional bank lending
• Not worthwhile repaying early: unlike some other forms of business finance, there’s no benefit to repaying early as you won’t typically save on interest or fees

What are merchant cash advances used for?

The funding from a merchant cash advance can be used for various business purposes. For example, you might choose to boost your general cash flow with the funds or buy new stock for your business.

You could also fund growth activities, such as marketing or customer service, or perhaps use the money towards your business taxes. Consumer-facing businesses, such as physical and online shops, restaurants, pubs, and hairdressers, benefit from this type of funding but also seasonal businesses that operate with fluctuating cash flow.

If you’d like to know more about merchant cash advances and how they could help your business, please get in touch with UK Business Finance. We’re highly experienced commercial finance brokers and offer our services free of charge.