What is a merchant cash advance?

What is a merchant cash advance?

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Merchant Cash Advance definition

A merchant cash advance, also known as a Business Cash Advance, is a short-term funding option that aligns with your business's seasonal flow. This is mostly for businesses that get a lot of their sales through card terminals. It works well for retailers, restaurants, and hotels.

This is because advance amounts are calculated using your company’s card sales only, not your total sales. This means if you take a large percentage of your sales in cash (or via invoice) you won’t receive as much credit as you could be eligible for.

Merchant Cash Advance in a nutshell 

  • Merchant cash advance is a lump sum payment from selling a provider a set percentage of your future card sales.
  • Repayments are taken automatically from your card sales every business day.
  • Only suitable for businesses who take the majority of their sales through card terminals.

How does a merchant cash advance work?

A merchant cash advance provider will review your past card sales. They will then give you an upfront payment, usually based on the average value of one month's card sales. You’ll then hand over a set percentage of your card sales every month until you’ve repaid the initial amount, plus any extra fees.

Using a merchant cash advance in the UK allows you to tie your repayments to your sales. That means when sales are good your repayments will rise, but if sales are poor they will fall. For some businesses, this is an excellent safety net which means that if your trade slows, repayments will not be more difficult to meet.

To get a merchant cash advance in the UK, you usually need to be in business for 6 months and have monthly card sales of £3,500 or more. These details can vary between providers, so make sure you check before applying.

Getting a merchant cash advance is typically far quicker and simpler than getting a bank loan. You won’t have to hand over a business plan and most providers will approve a company in days rather than weeks.

However, merchant cash advance contracts often have strict terms. Most providers require that you don't disrupt card sales. For example, you won’t be able to give a promotional discount to customers paying with cash. Your contract might also stop you from moving your business, using other forms of credit, or closing your business for more than a specified time. If you break the terms of your contract, you are at risk of being sued by your merchant cash advance provider.

How much does a merchant cash advance cost?

The amount you’ll pay back and the time you’ll pay it back over is determined by two things: the funding fee and the split percentage. The funding fee is a fixed cost you'll agree with your provider, but you may be charged some other fees too.

Your merchant cash advance provider may charge set up fees and early repayment fees. Do your homework beforehand. The overall cost of the business cash advance can be reached by adding these extra charges to your funding fee. It is important to confirm the terms of any extra charges before you enter into an agreement with a lender.

How long does it take to pay back?

This is dependent on what percentage of your card sales you’re handing to your provider per month (the split percentage). If the split is 10% and you make £20,000 in card sales each month, you’ll be paying back your provider £2,000 a month until you’ve repaid your merchant cash advance.

Split percentages vary between providers, but generally range between 10% and 30%. Research has shown most customers pay their merchant cash advance back in around six months.

Looking for a larger line of credit than a business credit card can offer? Check out our guides to alternative financing options, or find out how iwoca can help you secure a business loan in minutes.

Many providers, such as PayPal, will offer you lower funding fees if you agree to higher split percentages. This is because the higher the split, the quicker you’ll pay back your merchant cash advance. If you get a merchant cash advance, paying it back early usually won't lower the total amount due. There might be extra charges for early repayment.

Paying back a merchant cash advance

Example of a merchant cash advance with a 10% split on £20,000 in monthly card sales.

Split percentages vary between providers, but generally range between 10% and 30%. Research has shown most customers pay their merchant cash advance back in around six months.

Looking for a larger line of credit than a business credit card can offer? Check out our guides to alternative financing options, or find out how iwoca can help you secure a business loan in minutes.

Many providers, such as PayPal, will offer you lower funding fees if you agree to higher split percentages. This is because the higher the split, the quicker you’ll pay back your merchant cash advance. Because a merchant cash advance is not interest-based, making early repayments will generally not reduce the overall amount you pay back, and there may be additional fees involved in doing so.

How to refinance a merchant cash advance?

If a business is having trouble paying back their merchant cash advance, they can think about refinancing the loan. Refinancing involves obtaining a new loan to pay off the existing advance. Businesses can benefit from lower interest rates, longer repayment terms, or more manageable payment amounts. To refinance a merchant cash advance, a business should research and compare different lenders' terms to find the best option for their financial needs.

Typical example of a merchant cash advance

Let's say a restaurant owner needs funds to renovate their establishment. They apply for a merchant cash advance and provide their credit card sales data for the past six months. Based on their average sales, the lender determines they are eligible for a £50,000 advance. The lender agrees to collect 10% of the restaurant's daily credit card sales until the full amount of £55,000 (including fees) is repaid. This allows the restaurant owner to complete the renovations and pay back the advance gradually as they generate revenue.

What happens if you default on a merchant cash advance?

If a business fails to make the required payments on their merchant cash advance, they are considered to be in default. If a business doesn't pay back a merchant cash advance, it can cause problems. This includes hurting their credit score and getting sued by the lender. It is important for businesses to carefully review the terms and conditions of the agreement before accepting a merchant cash advance to ensure that they can meet the repayment obligations. In case of financial difficulties, it is advisable to communicate with the lender and explore alternative options to avoid defaulting.

How to record a merchant cash advance on financial statements?

When a business receives a merchant cash advance, it is important to accurately record it on their financial statements. The advance should be recorded as a liability on the balance sheet, representing the amount owed to the lender. In addition, the business should keep track of the repayments made for the advance. These repayments will reduce the liability. Businesses should consult with an accountant or financial advisor. They need to make sure the merchant cash advance is recorded and reported correctly on their financial statements.

What is the difference between a business loan and a merchant cash advance?

Business loans and merchant cash advance loans give businesses money, but they have differences. Banks and financial institutions like iwoca give business loans. These loans require fixed monthly payments for a certain time. Merchant cash advance loans differ from traditional loans. They are repaid based on a percentage of daily credit card sales. This payment structure offers more flexibility for businesses. Business loans have strict eligibility criteria. Businesses with lower credit scores or shorter operating histories can easily access merchant cash advances.

How to speed up your business growth with a merchant cash advance? 

A merchant cash advance can be a valuable tool for businesses looking to speed up their growth. Businesses can use quick access to capital to invest in growth opportunities like expanding operations and launching marketing campaigns. They can also purchase new equipment. The flexible repayment structure of merchant cash advances allows businesses to align their repayments with their revenue, enabling them to grow while managing their cash flow effectively. Yet, it is important for businesses to carefully check their growth strategies and ensure that the benefits outweigh the cost of the advance.

How to apply for a merchant cash advance?

Applying for a merchant cash advance is a relatively simple process. Businesses can start by researching different lenders and comparing their terms and rates. Once they have selected a lender, they will need to provide certain documentation, such as bank statements and credit card processing statements, to prove their sales history. The lender will then check the business's eligibility based on these documents and determine the amount they are willing to advance. If approved, the business can receive the funds relatively quickly, usually within a few days, allowing them to meet their immediate financial needs.

What are the main merchant cash advance providers in the UK? 

There are several direct lenders that you could look into if you’re based in the UK. Youlend, 365 Business Finance, Nucleus, Capify and Liberis are probably the most famous ones. You can also refer yourself to a broker if you have doubts on which one to pick. 

Frequently asked questions on Merchant Cash Advances

Does getting a merchant cash advance require a personal guarantee?

Although a merchant cash advance is tied to the value of your card sales, most providers will require you to sign a personal guarantee. This means you are legally liable for repaying the money borrowed, even if your business shuts down.

What if I grow faster than I expected?

If your business grows faster than expected, you could be paying your merchant cash advance back quicker than you bargained for. During these busy months of growth, your working capital could be limited, instead of being able to spread out repayments over a longer period with other financing options.

Planning and tracking repayments on a merchant cash advance is harder because business trade fluctuates.

Can I get ongoing funding from a merchant cash advance provider once I've already taken the funds?

Merchant cash advance providers may give you additional funds if you have repaid most of the initial amount.

Other finance options might be more suitable if you're looking for a revolving line of credit.

Article published on
January 24, 2023
Last reviewed on:
December 11, 2023

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