A Merchant Cash Advance (or MCA) is a short term funding option which follows the seasonal flow of your business. An MCA is 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.
- 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?
An MCA provider will look at your previous card sales and offer you a lump sum payment based on them, generally at the average value of a month’s sales. You’ll then hand over a set percentage of your card sales every month until you’ve repaid the lump sum plus any additional fees.
Using an MCA 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 is slow, your repayments will not be more difficult to meet.
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 MCA 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.
How much does a Merchant Cash Advance cost?
When using an MCA, 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 retrieval rate.
The funding fee is a fixed cost which is agreed with your provider when you’re approved for an MCA. Typically there will also be other fees to take note of (set up fees, early repayment fees, etc) which most providers will charge. The overall cost of the MCA can be reached by adding these extra charges to your funding fee.
How long does it take to pay back?
How long it takes to pay back your MCA is dependent on what percentage of your card sales you’re handing to your provider per month. This percentage is called the retrieval rate. If the retrieval rate 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.
Retrieval rates vary between providers, but generally range between 10% and 30%. Research has shown most customers pay their MCA back in around 6 months.
Many providers, such as PayPal, will offer you lower funding fees if you agree to higher retrieval rates. This is because the higher the retrieval rate, the quicker you’ll pay back your MCA. 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.
A butcher is looking for additional funding to advertise in their local area. Their monthly turnover is in the region of £10,000 per month, most of which comes in through card terminals.
A Merchant Cash Advance provider offers them an £8,000 lump sum payment with a £2,000 funding fee. The retrieval rate they are offered is set at 20% per month. It takes them 5 months to repay the total cost of £10,000. This equates to an approximate monthly interest rate of X.X%.
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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 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.
Can I get ongoing funding from a Merchant Cash Advance provider once I’ve already taken the funds?
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.
Alternatives to a Merchant Cash Advance
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 easier to get approved for, or be able to offer you higher levels of credit if your business doesn’t take all of it’s sales via a card terminal. You can find out more about them below: