A merchant cash advance (MCA) – also known as a business cash advance – is a relatively new form of lending that has steadily grown in its popularity. In the UK alone, there are already more than 150 lenders offering this form of finance. Essentially, it is a short-term unsecured business loan, different from the typical business loans available from a bank.
Why it’s different from a typical loan:
- Merchant cash advances don’t require regular repayments
- There is no ‘headline’ interest rate or Annual Percentage Rate quoted for this type of borrowing. Instead, you might be quoted a ‘factor rate’: for example, a factor rate of 1.15 means you repay 115% of the amount borrowed
- There is no fixed term, although a provider might be looking to receive full repayment within five to ten months
- You won’t have to provide a detailed financial business plan to a prospective lender, although they will still carry out an affordability assessment to make sure you are likely to be able to repay the advance. It might suffice to provide a few months of business bank statements to allow them to reach a decision
- You can still get a merchant cash advance with a poor credit history
- The application process is typically much faster than for a bank loan – the merchant cash advance application process often takes a matter of minutes, and the funds could be with you in as little as 24 hours.
How do I repay the advance?
The most innovative feature of merchant cash advances is that repayments are taken from the business’s credit and debit card transactions. Whenever one of your customers pays using a card, the merchant cash advance provider will take a set percentage of the transaction value – say 15% – and will use these funds as repayment for your advance. The remaining 85% is retained by your business. The lender will work with your card terminal provider, so the repayments will be taken automatically.
As repayments are made in this way, it means that you repay more when business is good. If you didn’t do any debit or credit card business in a given week, then you wouldn’t need to repay any of your advances during that period.
Conversely, when business is good, you make higher repayments. This contrasts markedly with the traditional business bank loan, where the lender will still demand that you make a fixed repayment even if you’ve had a terrible month.
How much could I borrow?
Typically, a lender might offer between £5,000 and £1 million via an MCA. More specifically, a business could perhaps get a loan equivalent to one month’s credit and debit card sales. If you get £20,000 of income via card transactions in a typical month, this might be the amount you are able to obtain as an advance. Some lenders might be prepared to advance as much as 1.5 times your monthly card transactions turnover.
Who might be able to get a merchant cash advance?
Most lenders require businesses to have been trading for a minimum period, before considering an application for an MCA.
These arrangements are clearly not suitable for businesses whose customers don’t pay using debit and credit cards. However, a high percentage of retail transactions are conducted in this way, even where the purchase price is fairly low. Providers can ask if you have monthly credit or debit card sales of around £5,000 before considering your application.
Unlike some forms of business finance, you don’t need to be a limited company. You can still apply for a merchant cash advance if you’re a sole trader or in a partnership.
The method of payment by your customer isn’t important. As long as a significant number of customers pay via credit or debit card, you can make use of MCAs.
What can the funds be used for?
The funds supplied via a merchant cash advance can be used for any purpose, for example, you might use them to:
- Carry out repairs and refurbishments
- Conduct a marketing campaign
- Replace outdated machinery and equipment
- Invest in the latest technology – in many sectors staying up to date with technological advances is vital in maintaining a competitive advantage
- Purchase stock
- Carry out staff training and development
- Take on new staff, whether on a temporary or permanent basis
How do you make an application for a merchant cash advance? Get in touch with a member of the team at Funding Bay. We will give your business consultation, and put your application in contact with the lenders on our MCA roster. These include Merchant Money, 365Business Finance, or FIBR.
