All you need to know about merchant cash advances
When there is a cash flow issue with your small business, you may need short-term financial help to bridge any gaps and help to pay the bills. One option that many businesses choose is a merchant cash advance. A merchant cash advance is a short-term financial option that is designed to help small business such as shops, restaurants, hotels and B&Bs.
What is a merchant cash advance?
A merchant cash advance, or MCA for short, is a funding option provided by lenders for short-term financial help. A merchant cash advance provides a business with a lump sum payment. This loan is then repaid to the lender automatically through the credit card sales.
As the lender is repaid through credit and debit card sales, then it is usually only a worthwhile lending option for businesses that take a high proportion of card sales, such as shops, pubs, restaurants and hotels. The lender will also set the amount they are willing to lend based on the business’ card sales only. This means if cash is used for most of your sales, you will not be eligible for a high credit limit.
Merchant cash advances work by automatically deducting a percentage of your future credit card sales until the loan, and the lender’s fees, are paid off. This percentage is predetermined. However, the benefit is that businesses do not have to think about repaying the loan, they can conduct their business normally while the loan is gradually repaid with every card payment.
The advantage is that when sales are on the up, the loan will be repaid quickly. If sales are slow, then the repayments will not be difficult to meet .
As a general rule, any business that uses a card terminal to take payments can apply for a merchant cash advance. However, depending on how money you make in an average month will determine how much the lender will let you borrow. As well as this, some lenders will require at least 12 months of trading using a card payment terminal.
For small businesses in the early stages of trading a merchant cash advance can be an ideal solution as it will quickly assess an average monthly turnover, rather than a detailed analysis of accounts. Furthermore, a merchant cash advance does not require any assets to use as collateral.
What can I receive?
The amount you can borrow will depend on your card takings, but many providers will offer from £1,000 to up to £200,000. Often, lenders will typically supply businesses with 85% - 100% of average monthly takings.
With a merchant cash advance, you will be expected to pay back the loan based on a pre-determined percentage of each credit card sales. Typically, that will be between 5% to 20%. Repayments will begin almost instantly, and the term is usually as long as necessary for you to make enough credit card transactions to repay the loan.
Include within the repayment will be the lender's fees and interest, which can be as high as 25% or possibly more. However, most providers will have a fixed interest rate, so you will know exactly how much you need to repay.
Benefits of a merchant cash advanceA scalable loan that you can repay based on the success of your business. The higher the sales, the quicker you pay back your loan.No credit check or excessive account detailing required.Flexibility with repayments mean if you have a quiet month, you don’t need to worry about finding the money for a fixed loan repaymentLeaves your options open - you can still open other lines of credit with a merchant cash advanceRepayments are easy and painless as the money is taking instantly and automatically.
Negatives of a merchant cash advance
- The amount you can borrow is limited to the proportion of card sales and business turnover; if you have a small cash flow, then you may not be able to acquire much.
- Lenders will often work with specific terminal providers, so the lenders you borrow from may be limited.
- You may need to sign a personal guarantee meaning you will need to repay the loan even if the business shuts down.
- Merchant cash advances are only useful for businesses that take a high proportion of credit card sales.
A merchant cash advance can be an ideal solution for short-term cash flow problems. While a merchant cash advance can be a flexible solution, there are other options which may be better suited to your business. If your company does not take card payments, for example, then options such as an overdraft, short-term loan or business credit card may be a more suitable option.