Merchant Cash Advances: Everything You Need to Know

1 month ago
89

Merchant Cash Advances: The Guide

The Merchant Cash Advance is a relatively new to market business funding option. Being relatively new, it might be something you’re less familiar with, but could be a really solid option for some micro businesses and a suitable alternative to more traditional business loans.

What is a Merchant Cash Advance?

A merchant cash advance allows your business to essentially borrow a sum of money and repay it from future card machine transactions.

 

In other words, your repayments take the form of a percentage of your card machine sales as opposed to being a set repayment amount each month.

In summary: 

 

  • You Receive a Cash Injection

    Much as you would with a business loan, you get a cash injection to repair machinery, invest in something new or whatever else you need it for

  • Repay a Portion of your Card Transactions

    You automatically repay in the form of an agreed percentage of your card terminal payments each day.

Merchant Cash Advance Eligibility Criteria

There can be slight variations from provider to provider in terms of eligibility criteria, but some consistent things include these:

 

  • Sole Trader or Limited Company

    There are providers who'll cater to both sole traders and limited companies

  • You Take Card Payments

    Whether through a terminal in your shop or online through an e-commerce payment gateway, you much take a chunk of your revenue through card payments

  • Turning Over £2,500+ Per Month

    Again, not an absolutely essential number to hit. But with most merchant cash advance providers, £2,500+ per month in card transactions appears to be a minimum level.

  • Trading for 3+ Months

    Some providers require you to have been trading for 6 or even 9 months before applying for a merchant cash advance. But there are providers offering them to businesses as young as 3 months old

How Much Can a Business Borrow with a Merchant Cash Advance?

This will vary from provider to provider and will also depend upon the revenue you earn through card transactions (whether online or through an in store terminal).

How Much do you Repay with a Merchant Cash Advance?

This again varies depending on your particular situation and the provider.

There’s no set APR with a merchant cash advance, however. 

Lenders instead use something called a “factor rate,” when determining how much you’ll repay.

What’s “Factor Rate,” in Merchant Cash Advance Terms?

A factor rate is a simple number by which the amount you want to borrow is multiplied to give the total you’ll repay.

Factor rates for merchant cash . advances could be as low as 1.1 or as high at 1.5 or 1.6 (even higher in some cases).

To best explain how this works, let’s look at a use case.

  • Let’s say your business is taking a merchant cash advance with a factor rate of 1.3
  • Let’s assume you’re borrowing £3,000
  • £3,000 * 1.3 would mean your total repayments would be £3,900

What Affects Factor Rate?

Factor rate can vary depending on a number of factors including:

  • Your trading performance or how much revenue you make through card payments
  • How long you have been trading
  • How consistent your revenue is
  • How high risk your business is deemed (i.e whether your industry is deemed high risk etc)

Again, this can vary from provider to provider and before taking any sort of business funding, you should certainly speak to an expert. But this should give you an idea as to how factor rate is likely to work.

What Happens if My Card Sales Drop?

Then it will take longer to repay than you might have expected. Unlike business loans in the more traditional sense, there are no fixed monthly repayments with merchant cash advances.

 

The factor rate is used to determine how much you repay and you also agree at the outset what proportion of your card takings you will repay. So if you have a great day in terms of card takings, you’ll pay more back that day. If you have a poor d ay. you’ll repay less.

 

As such, the length of time it takes to repay could be more or less than you initially expect.

 

How do you Make Merchant Cash Advance Repayments?

Repayments are generally taken automatically by the provider based on your card takings.

Am I Eligible for a Merchant Cash Advance if I Take Payments Online?

Yes. Even if you take your card payments online, i.e. through an ecommerce website or similar, you can still apply for a merchant cash advance and repayments will work in much the same way as if you were taking card payments through a terminal in a shop.

Pros and Cons of Merchant Cash Advances

 

Pros

  • High approval rates
  • Finance received quickly
  • Repayments based on earnings
  • Repayments are automatic
  • You know from the outset how much you'll repay

Cons

  • Only suitable if you take card payments and the amount you can borrow is only based in income through card payments
  • Often shorter repayment terms than other types of loan
  • Often costs more than other forms of borrowing

Speak to an Expert

If you’re keen to go ahead with a merchant cash advance, we’d always recommend you speak to an expert business funding professional first who can give you tailored advice specific to your business.

Leave a Reply

Your email address will not be published. Required fields are marked *

Don't be a stranger

Follow Us

Recent Articles

Get up to speed

Tax Return Statistics – How Many Are Submitting Late?

We get it. Submitting your tax return is not an enjoyable experience. It's one of those would-rather-poke-your-eyes out necessary evils of freelancing or self employed life though. Some are incredibly organised and submit it months in advance. Others (ahem, maybe...

2

HMRC Announces Update to IR35

3

Do Standing Desks Actually Offer ANY Health Benefits?

4

Alternatives to Coworking Spaces

5

How to Stop Procrastinating (And the Numbers)

6

The Business Sectors That Have the Best Survival Rates

7

Business Grants: A Postcode Lottery?

8

Startup Statistics UK 2020