Need to borrow money, but can't be sure when you'll be able to pay it back because of fluctuating sales? You could consider a business or merchant cash advance.
If you own a small business that relies heavily on sales, it can be difficult to borrow money – and you may be unsure of when you’ll sell enough to be able to pay it back.
If a decent portion of your sales goes through card payment, you may want to take a look at how business and merchant cash advances work.
What is a business cash advance?
A business cash advance is a form of unsecured business credit. You get a lump sum upfront from a lender, and you pay it back as a percentage of your business’s card sales.
Business cash advances don’t have a fixed term or interest rate. Instead, you’re charged a flat fee that’s agreed upon at the outset. You’ll know in advance exactly what the loan is going to cost you overall. By contrast, the repayment term is very flexible – and depends on how much money your business makes in sales.
This is the primary benefit of a business cash advance – if the going’s good, you clear your debt faster, and if things are slow, your contributions towards clearing the debt reduce proportionally. Either way, the overall cost remains the same.
With a merchant cash advance, the repayments are taken directly from your PDQ machine (credit card terminal) as a percentage of transactions, so you don’t have to do anything else – the money doesn’t even reach your account, it goes directly back to the lender.
Typical scenario
John owns an ice-cream truck and needs £8,000 to renew its freezer and internal furniture. It’s the very beginning of spring, so he knows he’ll be making quite a bit of money over the next few months – he just doesn’t know exactly when the British weather will allow it.
He takes out a merchant cash advance, effectively selling £9,500 of future sales to a lender for £8,000. That’s a fixed fee for the lender of 18.75%.
Most of his London-based customers pay by card, and 18.75% of each card transaction for the next few months will go directly towards repaying his debt. On a £10 card sale, John keeps £8.13, while £1.87 never reaches his account – instead it goes straight back to his lender.
John also gets quite a volume of cash payments, which won’t be affected.
Depending on how nice the spring turns out, he may be debt-free by June or a bit later – around October. Either way, he knows that the cash advance will have cost him the same amount overall, and repaying it will have been a hassle-free experience.
What’s the difference between a merchant cash advance and a business loan?
Despite serving a similar purpose (providing finance for your business), business loans and merchant cash advances work quite differently. With a business loan, you also get a lump sum at the beginning, but you pay it back monthly (normally by direct debit) in a pre-agreed period of time, and pay either a fixed or variable rate of interest during that time.
Acceptance criteria. It may be easier to get a merchant cash advance than a personal loan. Since repayment money is taken before even reaching your account, your credit score isn’t that important in establishing your willingness to pay the loan back.
Application process. Unlike business loans, merchant cash advances are usually quite fast to set up.
Interest rate. While comparing APR makes sense for a regular business loan (because the longer you keep the money, the more you’ll be charged), the interest you’ll pay on a merchant cash advance isn’t time-sensitive.
Cost. Overall, business loans tend to be cheaper than merchant cash advances, but you’ll have to qualify and commit to an established repayment plan.
Flexibility. This is the big one. Traditional business loans don’t offer much in the way of flexibility… if you have a lean month, well, tough luck. By contrast a merchant cash advance gives you breathing room when business is slow, or clears debt faster when business is good.
How should I compare merchant cash advances?
Merchant cash advances can be a bit tricky to compare, because you’ll have to rethink the way you usually look at loans – remember, the amount of time you keep the money for isn’t the main factor anymore. Look at:
Initial fee. Considering that merchant cash advances come with no arrangement or late payment fees, that’s really the only factor to consider to work out the cost. Think of it as a percentage to make the comparison between lenders easier – for example, if you borrow £10,000 and are asked to pay back £12,500, you’re being charged a 25% fee. What makes this trickier, however, is that the fee will often vary dependent on the lenders’s assessment of your individual circumstances.
Eligibility requirement. You may be able to get a merchant cash advance even if your business credit score isn’t ideal, but depending on the lender there’ll still be criteria to meet. Some providers only lend money if you have at least 12 months of merchant statements to show them, for example. Many providers have an eligibility checker that will tell you how likely you are to be accepted for a loan without impacting your credit score – use it.
How much money you need. You can usually get the equivalent of one month of your card takings, but different lenders may be able to lend more or less.
How long you need it for. Again, different lenders may offer different options, but most importantly: if you have a definite answer to the question, you may be better off with a more conventional (and cheaper) type of business finance.
Overall cost. If you’re comparing different types of business finance (for example, merchant cash advances and regular business loans), it may help you to leave APRs and rates aside for a second and think of how much the whole operation is going to cost you in absolute terms.
Applying for a merchant cash advance
If you’ve decided to go for a merchant cash advance, compared providers and checked your eligibility, you’re ready for the actual application. Here’s what you’ll likely need:
Your personal details.
Your business details (including its monthly income and what it does).
Proof of identity and address.
6 to 12 months of merchant statements (the lender will want to know how much your business usually makes in credit card transactions).
Your business bank statements.
Pros and cons of merchant cash advances
Pros
Quick to set up.
You may be eligible even with a less-than-ideal credit score.
No extra fees – you’ll know how much you’ll pay from the beginning.
Repayments are tied to your revenue – if you’re not earning much, you won’t have to pay back much.
Cons
Can be more expensive than many other types of business finance.
If only a little portion of your revenue comes from credit card payments, you won’t be able to borrow much.
Some lenders only work with specific terminal providers, which may in some cases cut you out from the best deals.
Repaying the loan early won’t save you money.
Alternatives to merchant cash advances
If you need finance but also flexibility, you can also consider:
A business credit card. A business credit card can be a good idea if you need a bit of flexibility for your monthly expenses and are also looking to improve your credit score.
A business line of credit. A business line of credit is a loan (or series of loans) that you draw down at your convenience (taking only as much as you need at the time). Subject to a minimum monthly repayment, you can pay back as much or as little as you like each month. If your business makes money more from invoices than from credit card transactions, invoice financing could be a solution.
Frequently asked questions
It’s a company that doesn’t directly lend you money, but assesses your business’s circumstances and puts you in touch with potential lenders.
Usually from as little as £2,500 to as much as £500,000. Typically you can borrow a month worth of credit card takings.
It is possible for a start-up to be approved for a business cash advance. In fact, this option is often snapped up businesses that aren’t available for more affordable business loans. Of course, before applying, you should check your business meets the eligibility criteria of the lender.
It depends on your circumstances, but you can usually be charged between 20% and 40% of the loan’s value. As we said, merchant cash advances aren’t necessarily the cheapest option when it comes to business finance.
No, you don’t. Merchant cash advances are an unsecured type of loan.
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Valentina Cipriani was a writer at Finder UK. She wrote news, features and guides about banking and credit cards, helping people to improve their financial lives. She holds an MA in International Journalism.
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