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 only 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.
An MCA 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 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 MCA, 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 an MCA 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 an 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 MCA provider.
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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 MCA provider. The overall cost of the MCA 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.
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 MCA.
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 MCA 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 an MCA 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.
*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.
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.
If your business grows faster than expected, you could be paying your MCA 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 will fluctuate month-by-month and seasonally, it’s much more difficult to plan for and track repayments on your MCA than with other forms of finance.
Sometimes it may be possible for an MCA 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.
If you're planning on applying for a merchant cash advance, it's worth considering which other finance options might suit your business better. These options can be more flexible than an MCA, allowing you to better manage your repayments in high-growth periods. They might also be able to offer you higher levels of credit if your business doesn't take all of it's sales via a card terminal.
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