What is a merchant cash advance?
A cash advance is a type of financing based on your business’s future revenue.
Unlike a traditional business loan, which involves a specific loan amount, interest rate, and repayment term, a cash advance sells a portion of future sales to the lender at a discount. The term “advance rate” is used instead of “loan amount.”
Cash advances are intended for businesses that accept card payments from customers. The business borrows a sum that it repays through a percentage of its card transactions.
This option is ideal for small businesses needing quick cash, often within 24 hours. Lenders typically require businesses to have been operating for at least six months and to have a minimum monthly card turnover of £10,000. However, some lenders may accept businesses that have been trading for just a month with lower transaction amounts, making it beneficial to use a lending marketplace to find the best options.
To qualify, you must be a sole trader, partnership, or limited company registered in the UK, and you need to regularly process card transactions, either online or via a card machine.
Cash advances are popular among businesses in hospitality, cafes, garages, retail, and e-commerce that accept card payments online.
How does a merchant cash advance work?
With a standard business loan, you receive a principal lump sum at the start of the term and pay interest for as long as that amount is outstanding. This structure applies to various types of financing, including loans, overdrafts, and revolving credit facilities.
Most common financing options operate on this principle, where the total cost—i.e., the interest paid on top of the principal—varies based on the repayment duration.
In contrast, cash advances work differently. Instead of accruing interest over time, the total cost of the financing is established upfront, eliminating the need for ongoing interest calculations. Instead, you have a fixed repayment amount to reach.
Example of a Merchant Cash Advance
- Cash Advance Amount: £10,000
- Amount Repayable: £12,500
- Monthly Repayment Percentage: 20%
In this scenario, the lender purchases £12,500 worth of future sales for £10,000, with a repayment percentage of 20%. The business receives £10,000 and will eventually pay back £12,500.
Repayments are deducted from your revenue, with the 20% not representing interest but rather the portion of sales going towards repayment.
Here’s how it works with sample transactions:
- Customer 1: Pays £10; you keep £8 (80%), and the lender receives £2 (20%).
- Customer 2: Pays £129.99; you keep £103.99 (80%), and the lender gets £26 (20%).
- Customer 3: Pays £450.96; you keep £360.77 (80%), and the lender receives £90.19 (20%).
After these three transactions, you’ve repaid £118.19 (£2 + £26 + £90.19). This is just a simplified illustration; typically, you would have many more transactions daily. The important takeaway is that each transaction gradually reduces the £12,500 total repayment amount.
A key aspect of this repayment method is its proportional nature: you pay more when revenues are high and less during slower periods. However, the total cost remains unchanged at £12,500, with no compounding interest.
This flexible repayment structure makes cash advances more adaptable than traditional business loans. Instead of a fixed monthly payment, your repayments fluctuate based on your sales performance.
What can I use a merchant cash advance for?
Like most short-term business loans, you can use cash advance funds however you see fit, as long as they are for business purposes and not personal expenses. Here are some examples of potential uses for your cash advance:
- Unexpected repairs or renovations
- Purchasing stock
- Working capital
- Emergency expenses
- Equipment upgrades
- Website development
- Technology enhancements
- Machinery
Unlike traditional business loans, which require fixed monthly payments, cash advances allow for more flexibility. Each time a customer makes a payment via card, a percentage is automatically directed to the lender. This means that when your business earns more from card transactions, you can pay off the cash advance more quickly.
Conversely, during slower periods, repayments will decrease accordingly.
How much can I borrow through a merchant cash advance?
Merchant cash advances typically range from £30,000 to £300,000. If your business generates substantial monthly revenue, you may qualify for a larger amount. In certain cases, based on the lender’s risk assessment, the cash advance could be as much as 150% of your monthly card sales.
What are the benefits of a merchant cash advance?
Flexibility: Repayments are made only when your business processes customer card payments, aligning with your sales.
Speed: You can often get approved for a merchant cash advance within just 24 hours, depending on the lender and application process.
Unsecured: These advances are unsecured, meaning you don’t need to back them with business assets.
Application Ease: Unlike traditional loans that may require a business plan, applying for a merchant cash advance typically involves less documentation.
Reduced Risk: Since repayments are automatically deducted from your card payment income, there’s a lower risk of defaulting on the loan.
Transparency: The total repayment amount is fixed, and lenders will disclose the total cost upfront when you take out the cash advance.
Are you ready to apply for a merchant cash advance?
When applying for a merchant cash advance, lenders will consider your average monthly turnover to determine a comfortable repayment amount. You must be a UK business with a card machine and have been trading for at least six months, although some lenders may accept less.
Each provider has different offerings, with variations in repayment lengths, interest rates, and terms and conditions.
Funding Options can assist you in navigating the business finance market to find a solution that fits your needs. The application process is quick and user-friendly, and it won’t impact your credit score. To get started, simply let us know how much you need to borrow, the purpose of the funds, and provide some basic information about your business.
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