Merchant Cash Advance

RED: Reduces net ongoing income from your card sales whilst the loan is outstanding
AMBER: No need for personal guarantees or credit checks as you are paying back the loan, as customers pay with their credit or debit cards
GREEN: Flexible repayments – pay less in slow months

I heard a new financial phrase the other day, merchant cash advance. I thought you might be able to tell me more about it.

Look, I have to admit to being a bit excited about a merchant cash advance. It’s a brilliant example of how finance and technology can work together to deliver something useful and really clever. It’s one of the newest and most interesting forms of alternative funding for small and medium-sized businesses.

Ok, I’m intrigued. So how does a merchant cash advance work?

These days most retail companies use card terminals for an increasing percentage of their sales. Electronic payments can be tracked and analysed easily. A merchant cash advance takes advantage of this.

Basically, a merchant cash advance is an unsecured advance of cash based on future credit card and debit card sales. The lender works with the card machine provider – the company which processes all your card transactions – to analyse your recent sales.

Because the electronic payment methods let the provider and user review sales data in a transparent fashion, the lender can get a clear view on the level of transactions flowing through your business. One of the real plus points of a merchant card advance is that because of this transparency there’s no need for a business to present a couple of years’ worth of trading accounts or to go through the dreaded credit check.

That must speed things up.

Exactly, this kind of borrowing can be very quick to arrange. Most lenders can arrange a merchant cash advance within 24 hours. The money will be in your account soon after.

Plus, because everything is determined by your sales there’s no need to give personal guarantees or any other kind of security.

Sounds great. So how are repayments managed?

Repayments are made as a percentage of your card sales and deducted directly at source from your card account, similar to the way your tax and pension contribution is deducted from PAYE salary by an employer. Repayments are taken each month until the debt is repaid, typically aiming for full repayment within 6 – 12 months.

That all sounds very convenient and painless.

And remember that you make repayments as a pre-agreed percentage of your monthly sales, not a fixed amount, so there’s no set figure to be paid each time, which can help significantly if you are a trader with seasonal sales for example.

Slow month, pay less. Strong month, pay more. And there are no late or early repayment penalty fees because there are no late or early repayments.

I agree, that is rather clever. What about the downsides of a merchant cash advance?

Well, the obvious one is that if you don’t process a significant percentage of your sales through credit or debit card transactions you’re going to find it difficult to secure an advance. For example, if you invoice for a lot of sales, you might want to think about an alternative such as invoice finance. If you need longer term finance, for example to buy equipment or machinery, asset finance might be a better route.

You really are reliant on your card terminal being an integral part of your business which is why a merchant cash advance is a good option for retailers with electronic points of sales.

How much of an advance can I get?

You’ll be able to get an advance linked to your actual sales and typically limited to one month’s card sales. If you want to borrow £50,000 but your monthly sales total only £25,000, you will probably be out of luck.

I understand. Any other disadvantages? How about fees and interest rates?

The ‘norm’ here is for an upfront fee to be charged and added to the loan at the outset, rather than ongoing interest. As ever though, make sure you read the small print to check for interest rates and make sure you understand any fees associated with securing the advance.

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