Merchant cash advance: flexible lending

A merchant cash advance is a flexible source of funding for businesses with repayments based on monthly sales, so you can repay what you can afford each month.

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Merchant cash advance: flexible lending

What is a merchant cash advance?

A merchant cash advance is a type of unsecured business loan, that can support business cash flow over the short term via an instant cash advance. There is no APR applicable, or hidden costs, but rather an agreement, that typically lasts from 6 months up to a year, and is repaid as a fixed percentage of future customer credit card sales made through card terminals. Now considered one of the most flexible forms of business funding, as repayments are proportional to sales, hence, if debit and credit card payments go down, your repayments also decrease—this makes cash flow management easier to handle.

What is the maximum I can get?

The amount on offer varies between different lenders, and is dependent on your financial situation, credit score, and trading history, yet the range is from £30k to £300k. You will be able to get more than that if your business has significant monthly revenue. In some cases, dependent on the lender’s risk assessment, the cash advance could be up to 150% of your monthly card sales.

Most suitable for?

Merchant cash advances are best suited to small businesses looking for a cash injection within 24 hours. UK businesses with a card machine that have been trading for a minimum of six months, and monthly card turnover of at least £10,000 per month (card transactions.) 

What can I use the cash for?

Like most short-term business loans, you are entitled to use it how you please, as long as it is solely for use in the business, and not for personal expenses. The main expenses that businesses use merchant cash advances are the following:

  • Unexpected repairs or renovations

  • Stock

  • Working capital

  • Emergency expenses

  • Equipment upgrade

  • Website development

  • Technology upgrade

  • Machinery 

Applying for a merchant cash advance

To qualify for a cash advance, you will need to be trading for at least three months, although this can depend on the lender. You will need to have an idea of the amount of funding you require, along with the following details:

  • Legal status of your business (sole trader, ltd..)

  • How long your business has been trading

  • Your average monthly card turnover

  • Business name

You can use a lending marketplace like Funding Options to quickly identify a lender that meets the unique requirements of your business. It might be the case that your business has bad credit, and a high street bank will not approve your cash advance, yet if you have a robust business plan, you may qualify for a merchant cash advance with certain specialist lenders. 

Advantages of merchant cash advances

A merchant cash advance offers many benefits to business owners, and the flexibility of repayment terms is among the most lauded advantages.

  • Easier to manage cash flow

  • Repay in proportion to card sales

  • Ideal for short-term lending

  • Fast approvals

  • No security required

  • Keep 100% of cash transactions

  • No hidden costs

Fees for merchant cash advances

With a merchant cash advance, you will only pay a small percentage of future card sales, and will avoid upfront fees and fixed payment terms. You automatically repay the short-term cash advance over six to twelve months, only when a customer card transaction is processed. Let’s take an example. A customer pays £1,000 with a debit card. Out of that £1,000, typically £900 will go to your bank account, and £100 will go to the lender, equating to 10% of the sale. The range is usually from 10% to 25%, depending on the lender, and the business. If the loan was for £20,000, and average monthly costs were £4,000, this particular loan would be paid back over 6 months, and the total amount repayable would amount to £24,000. It’s important to note that pricing is tailored to your business needs, and the amount repayable can change. Your lender will provide you with the full costs of the advance before you sign the agreement.

Is my business eligible?

The first and most basic requirement is that you are a sole trader, partnership, or limited company registered in the United Kingdom. The second fundamental requirement is that you regularly process card transactions from your customers—either online through a merchant gateway provider or on a PDQ machine. You won’t need to purchase a new card machine to be eligible for a merchant cash advance. This type of short-term lending is popular in hospitality, cafes, garages, and retail shops. This is also commonly used by ecommerce traders, that accept card payments online. Most businesses that qualify for an advance have card sales of around £2,500 per month. That said, many lenders will accept businesses that have been trading for just a month, with significantly less average monthly card transactions. This is why it’s helpful to use a lending marketplace to find the best deal on the market.

Factor rate calculation

Lenders use a factor rate to calculate the total repayment amount on your cash advance. This is a straightforward calculation, where the cash advance amount is multiplied by a factor rate number, usually between 1 and 2. For example, if you borrow £10000, the lender might set the factor rate at 1.5 hence (£10000 x 1.4 =£14,000) i.e £14,000 is the total cost of finance. It would be rare for a lender to set a factor rate as low as 1, but it could happen for very small loans. The rate is calculated based on the sector you operate in, and the performance of your business in the recent past.

Merchant cash advance with bad credit

It can be frustrating to get a loan with a poor credit rating, yet many lenders take a holistic view of your business, and can often overlook a bad credit score, by looking at a business plan, successes you’ve had in the past, any indication that you have a detailed business development plan and cash flow projections in the coming months. As long as the lender can be satisfied that you will be able to repay your cash advance within a year, your chances of getting the desired amount are high. Before applying, it’s worth looking into improving your score, by scrutinising your credit report, and pinpointing outstanding debt that could be cleared, and by making regular payments on time.

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Stuart Lawson

Chief Commercial Officer

Stuart is Chief Commercial Officer at Funding Options where he plays a key role in driving the growth of the business and its relationships with more than 120 partners. A finance industry veteran, he has a strong background in alternative finance, corporate and commercial banking, as well as global transaction banking.

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