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Merchant Cash Advances Explained

merchant cash advances

Small and medium size businesses are often looking for different ways to increase cashflow and support growth. One little known finance option is a merchant cash advance. But what are merchant cash advances and what type of businesses are they suited to? Keep reading to find out the answer to these questions as well as the pros and cons of merchant cash advances and how to apply for one. 

What is a Merchant Cash Advance?

A merchant cash advance is a relatively modern type of business finance, that is primarily suited to SME’s that use a card payment terminal. This type of commercial finance advances an amount of money against customer payments made via a card terminal. The cash advance is usually repaid via a percentage of future payments made via the card terminal until the advance has been repaid. Occasionally a fixed repayment value may be agreed. Usual terms are 10% of each card transaction, collected daily or weekly. Borrowing amount is based upon previous average transaction value per month and loan fees are applied to the cash advance. 

What Types of Business Should Use a Merchant Cash Advance?

Due to the nature of the lending requiring a card payment terminal a merchant cash advance is only suited to businesses that are primarily paid via this method. Lending is based on transaction value, with the usual amount lent being equal to approximately a month’s worth of transactions. Therefore, a business needing to borrow £15k with a monthly turnover via their card payment terminal of only £5k would be unable to secure enough via this method of commercial finance. There are many other types of finance available, contacting a commercial finance broker for expert advice would be the first step to ensuring that you take the right type of loan for your business.

Pros and Cons

As with all types of business finance there are advantages and disadvantages to opting for a merchant cash advance. It is important that you understand the pros and cons for your business prior to applying for any type of commercial finance. 

Advantages of Merchant Cash Advances Include:

  • Cash flow
  • Fast application process
  • Unsecured loan
  • Fixed cost of lending

Repayments for merchant cash advances are made via a percentage of sales through the card terminal. This allows for flexible repayments, if sales are up repayments are higher, but in the event of lower sales the repayments are also lower. This enables more consistent cash-flow management and allows your business to better manage tougher periods. 

Decisions regarding merchant cash advances are based upon previous sales history, lenders will have fast access to this data therefore speeding up the application process. Usually there is no need for credit checks or a business plan, that may be required for other sources of lending, meaning that approval and funds can be transferred quickly. 

A merchant cash advance is an unsecured loan. This type of lending reduces the risk to your business’s assets. As lending is secured against sales, and repayments are automatically debited from sales this reduces the risk to the lender. 

Loan fees are applied to the cash advance, meaning that you know exactly how much you will repay before agreeing to take the merchant cash advance. Repayments are debited from customer sales via the card payment terminal with approximately 10% of sales taken until the loan is repaid in full. 

Disadvantages of Merchant Cash Advances Include:

  • Borrowing is limited
  • Specific terminal requirements
  • Reliance on card terminal payments

Borrowing is limited by the amount of card sales when you are considering a merchant cash advance. For start-up businesses or those looking to greatly expand current sales may not be enough to secure the required amount of lending. In this case an alternative source of funding such as a bank loan may be a more viable option. 

Many lenders only work with certain terminal providers. If your terminal provider is not on an approved list, it may be difficult to secure a merchant cash advance. A commercial finance broker such as MC Commercial Finance will be able to help you to find an appropriate lender that would work with your terminal provider or offer alternative options. 

If your business takes multiple forms of payment a merchant cash advance may not be the best source of finance. Loan amount and repayments are based on transactions via your card terminal, this therefore, needs to be your primary source of income into the business. 

Merchant Cash Advances Application Process

When applying for any type of commercial finance using a broker is usually your best option. A broker has a wealth of knowledge and experience to ensure that the process is as hassle free as possible. Brokers know the market and the lenders, they have access to exclusive deals and rates, and are best placed to offer advice based on your individual situation. By using a broker, you are more likely to secure a merchant cash advance that best suits the requirements of your business and at the best rate. Book an appointment with MC Commercial Finance today to discuss your options.