NimbleFins guide to merchant cash advances
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Are you looking for short term funding for your business? Do you regularly use a cash machine to process customer’s payments? If so then a merchant cash advance may be suitable for your business. It’s a type of flexible business finance where you use customer’s payments to gradually repay the cash advance.
In this guide we explain how a merchant cash advance works and the pros and cons of using one. We also answer common questions like “how does a merchant cash advance work?” and “what are the interest rates for a merchant cash advance?”
Table of Contents
- What is a merchant cash advance?
- What are the pros & cons of using a merchant cash advance?
- How do I get a merchant cash advance?
- Frequently asked questions?
What is a merchant cash advance?
A merchant cash advance or a business cash advance is a type of short term flexible business finance for businesses with a high volume of customer card payments. Businesses receive a lump sum that is repaid with future customer card payments. The card payment provider sends the repayments directly to the cash advance provider so you won’t need to spend time processing invoices and repayments.
It can be easier to be accepted for a merchant cash advance than other types of business finance. That’s because providers sometimes consider businesses with limited credit history and few assets.
Key features:
- Repayments taken automatically by your card machine provider
- Flexible repayments based on a percentage of your card sales
- Suitable if you have a high volume of card payments
- May be accepted even if you’ve been refused other funding
- Can only borrow up to 2 months’ worth of card sales
How does a merchant cash advance work?
A merchant cash advance works by the provider advancing money in exchange for a fixed percentage of future card sales. Providers will assess your application based on your average sales and how much you can afford to repay. The provider works directly with the card machine provider so they can see how much cash you receive. Because repayments are collected automatically, most providers don’t carry out credit checks or need to see detailed financial records.
Once a cash advance is agreed, you will repay it using customer card payments. Repayments are taken at source based on a fixed percentage of customer card payments. The percentage due and the frequency of repayments (daily, weekly or monthly) will be set out in your cash advance agreement.
What is a merchant cash advance for?
A merchant cash advance is best suited to short term finance needs, including the following:
- Improving cash flow - a merchant cash advance can help businesses that are struggling with short term cash flow problems.
- Financing seasonal businesses - your business can pay for buying stock or hiring temporary staff and repay the advance once they receive cash from sales. This is particularly useful if you make most of your sales at a certain time of year.
- Funding business expansion - you can finance a small business expansion, however bear in mind that you can’t usually raise enough for significant expansion costs.
- Paying an unexpected bill or expense - you can use a merchant cash advance to pay an unexpected tax bill and to repair or replace business equipment.
Alternatives to using a merchant cash advance
There are several alternatives types of short term business finance, including the following:
- Simple business loan - this works like a personal loan with interest due monthly on the borrowed amount.
- Bank overdraft - like a personal overdraft, you will only owe interest on the amount outstanding at any time. However, this can be a risky way of borrowing as lenders can withdraw an overdraft facility with no notice.
- Bridging loan - many businesses use bridging loans to finance the gap between selling one property and buying another, although they can also be used for other short term borrowing needs.
- Working capital loan - an umbrella term that includes simple short term loans, business lines of credit and merchant cash advances.
- Business line of credit - this is a flexible type of business loan where you can borrow and repay cash up to an agreed limit.
- Asset finance - used by many businesses to buy or lease assets. The loan is usually secured on the assets and can be short or longer term.
- Invoice finance - this is where lenders advance cash based on the value of your invoice book. The loan is repaid when cash is received from customers.
What are the pros and cons of a merchant cash advance?
Here are the main pros and cons of a merchant cash advance:
Pros
- Quick to arrange - many providers offer quick decisions on merchant cash advances within 24 hours.
- Easy to arrange - providers often don’t need to see detailed financial records or perform credit checks.
- High acceptance rate - merchant cash advances have a high acceptance rate of up to 90%.
- Repayments are automatic - repayments are taken automatically when you make sales, freeing up admin time.
- Flexible repayments - you’ll be able to repay the loan when payments come in. That means you can match your repayments to the success of your business and pay a smaller amount in months with fewer sales.
- Simple charges - providers charge a simple repayment charge rather than interest rates. There are also no hidden fees so it will be easier to budget for your repayments.
- No assets required for security - it can be a great option if you don’t have many assets to use for security.
Cons
- Expensive - you’ll have to pay back an average of 10% to 50% on top of your loan, depending on your period of borrowing and your type of business.
- Limited borrowing amount - providers won’t usually consider lending more than two months’ worth of card sales. This means if you only make sales of £1,000 per month via your card machine you are unlikely to be able to borrow more than £2,000. Some providers also won’t lend to businesses with less than £5,000 card sales per month.
- Only work with some card machine providers - some merchant cash advance providers only work with certain card machine companies so you may have to switch your card provider.
- Quick repayments - you may have to repay your loan more quickly than with other kinds of business finance.
- Difficult to compare costs - it can be difficult to compare the costs of a merchant cash advance to other types of business finance because you won’t be given an APR or charged interest.
How do I get a merchant cash advance?
The application process for a merchant cash advances varies depending on the provider. Most providers will ask to see the following information:
- Personal details including photo ID
- Details of your business
- Details of how much you want to borrow and the loan period
- Information on your regular cash sales
Where to get a merchant cash advance
Here are some providers of merchant cash advances:
Frequently asked questions
A merchant cash advance is unlikely to affect credit score in most cases as most providers don’t report details of merchant cash advances to credit bureaus. However, if you have a court judgement after defaulting on a merchant cash advance then this may affect your credit score.
A merchant cash advance usually costs between 10% to 50% of your total loan amount. The fees are expressed as a “factor amount” and work like this - if you borrow £10,000 with a factor rate of 1.2, this means you’ll repay £12,000 in total
It may be easier to get accepted for a merchant cash advance than other types of business finance if you have a bad credit rating. This is because lenders make their decision on your future cash sales rather than your credit rating. The repayments are made automatically so there’s less risk you will default.
There are no interest rates on a merchant cash advance, but you’ll be charged fees instead. These fees are between 10% to 50% of your total cash advance amount.
Most lenders can make a lending decision straight away and give you your cash advance on the same day or within 24 hours.
A merchant cash advance doesn’t require a personal guarantee as you’re effectively selling part of your business’s future card sales.
It may be possible to get a merchant cash advance as a new business, although providers may need to see at least 6 months’ worth of card sales data. Lenders will assess your application based on your level of card sales and expected level of future sales.
A merchant cash advance is legally a type of contract rather than a business loan. This means that a lender can sue you in court if you don’t keep your repayment commitments. A court judgement may still affect your credit score and ability to access finance in the future.