A Merchant Cash Advance is a type of business loan that is becoming popular with SMEs. It provides access to cash for businesses in return for a proportion of credit card and/or debit card sales. It’s typically short term (2 years or less) where repayments are taken as a percentage of revenue.
Any business that uses a credit/debit card terminal for their sales could, in theory, apply for a Merchant Cash Advance. For businesses who may not have the assets to secure a traditional business loan or have insufficient credit history, a Merchant Cash Advance is a flexible alternative finance option.
The concept is relatively new but is becoming more popular with smaller businesses who may not have much in the way of assets but have a good and regular volume of monthly sales. For example, the leisure and retail sectors, such as shops, restaurants and bars can find it more difficult to secure finance. But if those businesses have a strong, positive cashflow, then a Merchant Cash Advance is a good option to consider.
The business (the Merchant) borrows a lump sum from a lender and pays it back, usually on a daily basis, as a percentage of customer credit card sales, rather than a fixed repayment amount. This means that the Merchant Cash Advance repayments are flexible, with payments increasing and decreasing depending on how much money the business makes. The application process is quicker and simpler than traditional business loans, but application success and the amount of the loan the business can borrow will still depend on factors such as average monthly turnover and how much the business can afford to repay.
When a business takes payments from customers through a credit card terminal, the transactions are processed by the card terminal provider. Merchant Cash Advance lenders work with card terminal providers, so that when each credit/debit card sale is processed, a certain percentage of the receipts are used to immediately pay back the loan. They’re deducted at source, in a similar way that income tax is deducted.
There are a number of lenders that offer Merchant Cash Advances, and while their products all work in the same way, their interest rates, T&Cs and repayment terms may differ, so it’s prudent to compare Merchant Cash Advances to get the deal that’s right for your business.
When making a Merchant Cash Advances comparison, you need to consider the pros and cons of taking out this kind of loan.
– The setup for Merchant Cash Advances is quicker than for a traditional loan, with less paperwork, and in some cases be agreed and set up in as little as 24 hours.
– There’s usually no requirement to use assets as security (such as property or equipment) so they won’t be at risk if you are unable to keep up with your repayments.
– The repayments occur automatically.
Since the percentage of card terminal sales is taken at source, there’s no risk on defaulting on payments and therefore no threat of late repayment charges. As the repayments are fixed as a proportion of your card sales, there’s no minimum repayment amount The more you sales you make, the bigger your repayments will be and the quicker you’ll pay off the loan. It also means that when business is quieter, you won’t have to worry about managing to find money to pay a fixed amount, as when your revenues are smaller, your repayments will be, too.
Keep in mind when you compare Merchant Cash Advances, that while there are many benefits, this type of financial solution doesn’t suit every type of business. Other products, such as short-term business loans or asset finance may be a better fit. While there are a number of benefits, it’s important to weigh up the drawbacks, too.
– The amount you’re able to borrow depends on your turnover. If you’re not turning over enough in a month to borrow the amount you want, your prospective lender will turn your application down. Generally, lenders will calculate the amount they’re willing to lend as up to 100 percent of what your business takes through a card terminal in an average month.
– If card terminal transactions don’t make up the bulk of your business’s receipts, a Merchant Cash Advance may not be the most suitable option for your business. For example, if a significant amount of your turnover comes from raising invoices and receiving payments via bank transfer, these receipts will never be included in a Merchant Cash Advance lender’s assessment. You may be better off looking for another type of finance.
– Not all lenders work with all card terminal providers. That means some lenders will be ruled out immediately, depending on which terminal provider you use.
In addition to looking at the pros and cons of Merchant Cash Advances, other things to consider are the costs. These include fees and interest rates, and are affected by the type and size of the loan, the repayment terms and the size of the lender. Some lenders will charge an administration, booking or processing fee upfront, others may include them as part of your repayments. If you’re arranging a Merchant Cash Advance through a broker, there’ll be brokers fees to pay as well. Make sure you get a full breakdown of the fees, which are paid upfront and which are included in repayments, when you compare Merchant Cash Advances.
Before deciding on which type of finance is best for your business, it’s important to consider all types of business loan. A professional adviser can help you understand and identify which type of loan is most suitable for your business’s needs, and here at Bright Loans we offer Merchant Cash Advances comparison quotes as well as quotes for a wide range of other business loans.