How Do Merchant Cash Advances Work?

If you are a small or medium sized business and you take credit card payments, then a merchant cash advance could be exactly what you need for an extra cash injection. Instead of waiting for the credit card companies to pay out you can get an advance on these payments ranging from £5000 to £50,000 and provide a much needed cash flow for your company.

TechRound has written this guide to show you what merchant cash advances are and how you might be able to make the most of them for your business!

What Is A Merchant Cash Advance?

A merchant cash advance is a way that business can recieve money upfront from future credit card sales. It is most popular with retailers, restaurants and hotels that are constantly taking credit card payments as part of their business.

Often credit card payments can take 30 to 90 days to clear and be paid to the retailer and this means that there can often be a shortfall of cash for the brand. This is where merchant cash advances come in,  it means that you can receieve some of the credit card payments you are expecting.

This payment often ranges from £5,000 to £50,000 and you can use this money for anything that you might be struggling with. This can include paying staff, buying stock or any other business expenses.

The process is extremely straightforward, the money is paid upfront to you. Although a tiny percentage of the money is taken as payment to the lender this is collected and processed through your own credit card machine so you do not need to worry about it.

How Much Does A Merchant Cash Advance Cost?

Payment plans will vary from lender to lender but generally the repayments start from around 1.9% APR. The lender will agree with you to take a small amount of daily sales that will be used to repay the loan.

It is a very low cost form of finance because repayment plans are based on the predicted sales of every individual business.

Is My Business Eligible For A Merchant Cash Advance?

It is important to note that there are a few eligibility criteria to make sure that your business is eligible for a merchant cash advance. These are pretty simple and most UK business will be eligible for these type of loans.

To be eligible for a merchant cash advance:

  • You must have a UK limited company that is trading in the UK
  • The business has been trading for a minimum of 6 months (some lenders may require 2 years trading history)
  • Monthly credit card sales of at least £5,000

You are also eligible for a merchant cash advance even if you have bad credit. This is because repayments are based off your predicted sales as a business not your personal credit score or history of loan repayments.

Which Businesses Use Merchant Cash Advances?

Merchant cash advances can be used by any companies that take credit card payments. This means it does not matter the size of the company but there are certain industries that merchant cash advances might favour.

Lewis Jordan of Redstone Search commented: “Merchant cash advances can be sued by anyone that qualifies for this financial product. It doesn’t matter if you are a private banker or a cleaner. The purpose of these loans is to help people at the point of sale, so long as they fulfil the eligibility criteria and they can be a great help in times of need.”

If the main source of income for the business is through card payments then a merchant cash advance is perfect for them. These industries usually include:

  • Shops and retailers
  • Grocery stores
  • Restaurants and bars
  • Hotels and B&Bs
  • Hair and beauty salons
  • Fashion and clothes stores
  • eCommerce and online stores

Receiving the money upfront allows these companies to pay expenses that they were struggling to pay without getting the credit card payments through.

How Long Does A Merchant Cash Advance Last?

This entirely depends on the type of repayment plan that you decide to take with your lender. Merchant cash advances can be used for between 1 month and 5 years. Whether you just need a cash injection for 1 month to get you back on your feet or if you need it for longer then both of these are possible.

In order to avoid paying extra interest you might want to have this cash advance for shorter but you can decide to clear your account at any time if you decide to borrow for longer.

What Information Do I Need For A Merchant Cash Advance?

In order to get your merchant cash advance, much like in the case of different types of short term loans, lenders will have an eligibility criteria for borrowers to consider and thus, there are a few things you will need to provide to the lender in advance, which are likely to include:

  • Proof of limited company
  • 4 months’ worth of credit card statements
  • 3 months’ worth of business bank statements

In case that you cannot repay the loan you may be asked by some lenders to provide security and personal guarantees including on your property.

Are Merchant Cash Advances Safe?

In short, yes. Although not regulated by the Financial Conduct Authority (FCA), they are a recognised form of lending and have been used many times before making them a safe bet if you need the cash.

However, merchant cash advances can get dangerous or tricky if you cannot afford the repayments. Although small you need to make sure that you are still receiving enough money from your business to repay these merchant cash advances.

If not the lender could repossess your or your guarantor’s property in order to pay off the debt. Always make sure you know how and when you are paying off your debt so that you do not run into trouble with repayments.

Are There Alternatives To Merchant Cash Advances?

Yes, alternatives exist to merchant cash advances although they might not be as simple or as cheap! You can get full business loans but the repayments will be at higher interest and they will not come out of your credit card terminal.

Moreover you can look at using 0% credit cards or borrowing from family and friends in order to bridge the gap until you can make repayments.

—TechRound does not recommend or endorse and financial practices. All articles are purely informational—