A merchant cash advance is a type of unsecured, short term business finance. It is an innovative loan product that uses your card terminal to secure the lending. It has proven popular with certain sectors such as retail, restaurants an general leisure sectors. It is designed to help businesses gain access to their cash in a flexible way as repayments are taken as a proportion of your revenue.
The way it works is, the lender will provide you with a sum of money which is paid back in instalments through a percentage of your customer card payments. The amount that is repaid will be agreed with your lender and this will be taken from as a percentage amount from each card payment made. So, the more you sell, the more you pay back and the faster your loan is cleared.
The repayments are made automatically so you never see the money for the repayments.
The amount you borrow depends on your turnover. So, you will only be able to secure an amount of funding if it is in line with your cashflow position.
It only makes repayments based on card machines. If you have a business that received payments in a variety of ways, it probably is not the best option.
With a merchant cash advance, you don’t make regular repayments in the same way as you might for a traditional loan. However, over the course of the repayment term you will typically have to repay between 110% and 150% of the amount borrowed. The key term here is the ‘factor rate’ – with merchant cash advances you’re not normally quoted an interest rate or an APR – so if you have to repay 110%, your advance has a factor rate of 1.1.
Exactly how much you pay back will depend on your trading history – it’s very difficult to get a cash advance if you’ve been trading for less than one year – the business sector you operate in and the risk the provider believes you represent. However, it’s not uncommon to repay around 120% of the amount borrowed, I.e. a factor rate of 1.2.
The various fees – such as arrangement fee, broker fee, origination fee and funds transfer fee – could easily add up to around 5% of the loan amount.