For businesses looking for fast access to working capital, many consider more generic business loans. But many don’t know about merchant cash advances. This finance option does not have lengthy approval processes or rigid credit requirements. It’s simply based on the business’s card sales.
What Is a Merchant Cash Advance?
A merchant cash advance is an advance against a business’s future credit and debit card sales. Lenders provide businesses with a lump sum of working capital, and the business repays this through a percentage of their daily card transactions. This form of financing works well for small businesses with consistent card sales. Merchant cash advances in the UK have become quite popular in recent years, particularly around retail, hospitality, and e-commerce businesses that process high volumes of card payments.
The application process for a merchant cash advance in the UK is straightforward, and the approval time is typically faster than a bank loan. The repayments on the merchant cash advance are flexible, as they are based on the business’s revenue. This is incredibly useful as fixed monthly payments can add strain on a business if they’re experiencing a slower month.
How Does a Merchant Cash Advance Work?
A merchant cash advance is essentially when a business sells a portion of its future card sales to a lender. Here is an example of how a merchant cash advance in the UK works:
- You receive an advance of £20,000
- A factor rate of 1.3 is applied, meaning you repay £26,000 in total
- A fixed percentage of your daily card sales is collected automatically until the balance is cleared
Because repayments are tied to your sales volume, the time it takes to repay varies. A strong trading month means faster repayment; a quieter month means smaller repayments.
What Are the Costs of a Merchant Cash Advance?
The costs of merchant cash advances are not as simple as a percentage of your card sales. Businesses need to understand that the costs of a merchant cash advance are comprised of a factor rate, origination and underwriting fees, funding fees, and broker commission.
Factor Rate
Merchant rates do not have interest rates or APRs. Instead, these financing options have a factor rate. Factor rates typically range between 1.1 and 1.5. The higher the factor rate, the higher the repayment total.
Origination and Underwriting Fees
Some lenders may choose to charge origination or underwriting fees. These fees are typically deducted directly from the merchant cash advance, which means the business will receive less than the agreed amount.
Funding Fees
Some lenders may choose to charge a funding fee. Funding fees are typically between 7% and 8% of the merchant cash advance amount. For example, on a £20,000 advance, the funding fee could be between £1,400 and £1,600.
Broker Commission
If you’re working through a broker, their commission is built into the deal. In some cases, funders allow brokers to “upsell”, adjusting your offer to increase their commission at your expense.
Is a Merchant Cash Advance Right for Your Business?
A merchant cash advance is worth considering if:
- You need capital quickly and can’t wait for a traditional loan
- Your business processes a consistent volume of card payments
- You’re comfortable with a flexible repayment structure tied to daily sales
- You’ve compared the total cost of the merchant cash advance against other funding options
However, it may not be the right fit if your card sales are irregular, if you’re already managing tight margins, or if the total repayable amount significantly outweighs the benefit of the capital injection.
Looking for a Merchant Cash Advance in the UK?
At Funding Bay, we pride ourselves on assisting UK businesses in accessing fast, transparent funding, including merchant cash advances suited to your business’s turnover and card sales. We believe that you should know exactly what you’ll be paying before you commit to a financing option.
If you are interested in procuring a merchant cash advance and want transparent advice from a team that puts your business’s needs first, get in touch with Funding Bay today. We’ll help you find the right funding solution for your needs.
