What is a merchant cash advance?
A merchant cash advance, also known as a business cash advance is a type of short term, unsecured business finance. They are a natural alternative to the traditional business loan and are a relative newcomer to the business finance world, having only existed for a few years.
Merchant cash advances are a potentially ideal solution for business owners who take a reasonable proportion of their income through their card machine.
How do they work?
Although they are used for the same purpose, business cash advances work in a slightly different way to standard business loans. When you take a merchant cash advance, you are effectively selling your future card sales at a discount in order to access the money sooner.
Repayments are then taken daily, by repaying a proportion of your daily card sales directly to the lender automatically, through your card takings.
Repayments are therefore linked to your future card receipts, meaning if your card takings are low, the amount repaid that day will be lower. On your stronger days, you will repay more. This means that, unlike business loans, there is no set repayment term for a merchant cash advance.
This makes calculating an interest rate for your borrowing hard, as you repay a set amount, as agreed at the start. The amount of time taken to repay will then affect what the effective interest rate is. As such, it can be difficult to compare the cost of borrowing to other forms of lending upfront.
The pros and cons of taking out a business cash advance
- Your repayments taken care of for you by the lender. They deduct an agreed percentage of your takings, and you receive the net figure, meaning that by the time the money arrives in your bank, there are no more payments to make. This saves time having to work out your cash flow to ensure the payments are made.
- You pay back less during quiet periods, meaning it’s always affordable. During your quieter weeks or months, your payments reduce. When borrowing through a traditional business loan, your repayments remain the same each month, meaning it could become unaffordable.
- Only your card payments are used to repay a merchant cash advance and your other takings remain yours. This means you aren’t having to give up a percentage of all of your takings, only your card revenue.
- As your business grows, so can your facility. Where a borrowing need remains, you can effectively grow your facility in line with your business growth.
- Merchant cash advances can be arranged very quickly, which is ideal when you need funds to fund an immediate and unexpected event. Funding can often be arranged in as little as 24 hours.
- You know exactly how much you have to repay, meaning the cost of borrowing is clear from the start
- If only a small proportion of your takings are taken through your card terminal, you may be unable to secure the level of funding you need, even if it is affordable.
- Depending on the card terminal provider than you use, you may be restricted in your choice of lenders. This could result in you having to take out more expensive funding than is really necessary.
Important points to consider before taking out a business cash advance
Before taking out any form of finance, it’s important that you consider every possibility to ensure you’re making the right decision. Below are a few key points to consider before taking a merchant cash advance.
- How much of your monthly card takings can you afford to give up to repay the debt? It’s a good idea to consider this before engaging in conversation with a potential lender, as you must be clear that the repayments won’t cause problems further down the line.
- Is a merchant cash advance the best option? The term offered tends to be shorter than those offered for traditional business loans. If it’s key that you keep your repayments to a minimum, a business loan spread over a longer term may be a more suitable option.