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What is a merchant cash advance?
Take advantage of this progressive form of flexible funding built for retailers.
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Without time-consuming credit checks and rigid repayment plans, merchant cash advance is perfectly suited to the fast-paced, unpredictable world of retail. Similar to a business loan, but with several important differences, a merchant cash advance may suit any company that receives the majority of its payments by card.
What's in this guide?
How does a merchant cash advance work?
A merchant cash advance is an amount of money paid by a lender to purchase a company’s future transactions. In return the lender will take a percentage of each sale your company makes until you reach your pre-agreed payback limit.
What are the features of a merchant cash advance?
The advance involves two figures that make up the repayment:
- Holdback. This is the amount of each transaction your company makes that will go to the lender. It is usually 10-20% of the amount paid to you in a customer transaction.
- Payback. This is the pre-agreed profit the lender will receive in addition to the loan repayment. It is typically 20-40% of the loan amount, but this can vary depending on the amount borrowed as well as the size and perceived security of your company.
Can I set up a merchant cash advance for my business?
There is a simple application process, which means it is possible to be approved for a merchant cash advance quite quickly. Most lenders will want to evaluate the health of your business, but for smaller amounts a check of your credit file may be unnecessary. There is also no need for secured assets as the lender’s money is tied safely to your future income.
Once your application has been approved, the lender will help you to open a separate bank account known as a “pass through” account. You can then use this for processing any transactions and the lender can collect their share.
What are the benefits of a merchant cash advance?
There are several benefits and features of this form of finance, including:
- Quick and efficient. Unlike business loans that can take months to be approved, a merchant cash advance can provide you with much-needed funds in a couple of weeks or less.
- No secured assets. You don’t need to provide any business or personal assets to be approved in order to qualify for a merchant cash advance.
- No credit checks. While this isn’t guaranteed, advances for smaller amounts can regularly be obtained with a less-than-perfect credit score.
- Adaptable repayments. The amount you repay changes according to your earnings. This ensures small companies with changing levels of income don’t get caught out with fixed repayments.
- Carefully calculated terms. By reviewing historical sales data a lender can accurately gauge how long it will take your company to repay an advance. This means there is rarely the need for the penalties and inflated fees that a loan can incur.
Are there any drawbacks?
- The cost. This type of advance can be considerably more expensive than a business loan.
- Not a long-term solution. Merchant cash advance plans usually last no longer than 12 months. Along with the cost, this means they are unlikely to provide positive results other than for a short period.
- Being paid for future transactions can be a risk. While past sales information should be an accurate indicator of future sales, industries such as retail and hospitality can be fickle. If your business can no longer pay off the advance, you will need to find the repayment money elsewhere.
Anything else to watch out for?
It is important to consider how a lender is going to view your business before you ask for an advance. If you are looking to borrow a large amount and the lender has little faith in your company, it could mean a payback rate of as much as 60-70%. As with any loan, you need to make sure you have a clear plan for the money and how you are going to pay it back.
Compare other business loan options
If your business has a few outstanding invoices, invoice financing can help manage your cash flow and get access to funds you need. It's a type of business loan that is secured by the unpaid invoices and comes with reduced risk, no asset requirements or interest payments.
Picture: Shutterstock
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