What is a merchant cash advance?

With a Merchant Cash Advance, you're advanced money by a company in exchange for a set percentage of your daily credit and debit card sales, plus their fee.

Merchant Cash Advance definition

A merchant cash advance (or MCA), sometimes called a Business Cash Advance, is a short term funding option which follows the seasonal flow of your business. It's predominantly suitable for businesses which take a high percentage of their sales via card terminals – for example 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.

Quick fire facts

  • 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 look at your previous card sales and offer you a lump sum advance based on them, generally at the average value of a 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 additional fees.

Using an 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 be eligible for a merchant cash advance in the UK, most providers require you to have been in business for at least 6 months and to have average card sales of at least £3,500 per month. 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, the terms of a merchant cash advance contract can often be very restrictive – almost all providers will require that you don’t interfere with your card sales in any way. 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.

Set up fees and early repayment fees are just two examples of what could be charged, so it's a good idea to do your homework on your merchant cash advance provider. 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 additional 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.

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.

Typical example of a merchant cash advance

Merchant cash advance example *In this example, the butcher’s monthly income from card sales is £10,000. Using an MCA with a 20% split, they unlock £8,000 from their forthcoming sales. To pay back the loan, they'll make five payments of £2,000, totalling £10,000.

Frequently asked questions

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. This could constrain your working capital in these high-growth months when other forms of finance would have allowed you to spread the repayments across a longer timescale.

Because your businesses' trade may fluctuate month-by-month and seasonally, it’s much more difficult to plan for and track repayments on your merchant cash advance than with other forms of finance.

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

Sometimes it may be possible for a merchant cash advance provider to give you more funds, however you must usually have repaid the vast majority of the initial amount advanced before they will consider this.

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

iwocaPay – an alternative to a merchant cash advance

If you're planning on applying for a merchant cash advance, it's worth considering all your options. One alternative is our 'everybody-wins' invoicing solution – iwocaPay.

Designed with B2B businesses in mind, iwocaPay allows suppliers to get paid upfront and on time, while giving buyers up to 90 days to pay for their purchases.

Coronavirus has made cash flow tight for both buyers and sellers, with many businesses' turnovers having fallen since lockdown was implemented. Sellers are offering shorter payment terms to protect their liquidity and prevent losing money on sales, while buyers need more time to pay what they owe to cash advance companies. iwocaPay removes the friction between businesses, allowing buyers and sellers to get on with running their businesses.

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Jamie Maddison has written for a range of publications including Lonely Planet, Geographical, Diplomat, and Hidden Europe.

Article updated on: 11 May 2022

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