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What is a merchant cash advance?
A merchant cash advance is an unsecured business loan that allows businesses to raise finance against their future credit card sales.
Acting as a short term cash injection, a merchant cash advance can be a quick way to raise capital for your business, so you can ease a cashflow gap, or have the funds available to invest into your business.
Merchant cash advances involve no APR or hidden fees as the loan is repaid as a percentage of your future credit card sales.
What can I use a merchant cash advance for?
You can use a merchant cash advance for a variety of reasons. Merchant cash advance loans could be the right option for your business if you need to:
- Pay an upcoming VAT bill
- Ease your cashflow
- Purchase more stock
- Update your premises
- Invest in marketing
- Purchase new equipment
- Fulfil a large order
Who is a merchant cash advance loan most suitable for?
If your business takes card payments, a merchant cash advance could be suitable for you.
Examples of businesses that could benefit from a merchant cash advance:
- Coffee shops
- Restaurants and takeaways
- Retail shops
- E commerce stores
- Pubs, bars and clubs
- Garages
- Hairdressers and salons
- Hotels
Merchant cash advance lenders will have varying requirements, but most will need a business to have been trading and be taking card payments for at least 3 months. It can be a suitable option for businesses that have been declined for other long term business loans.
How does a merchant cash advance work?
A merchant cash advance lender will calculate how much they can lend a business by the amount of monthly card sales revenue. Usually this will be 1.5 x the monthly revenue of the business.
There is no APR for a merchant cash advance. Instead a set percentage is agreed upfront with the lender, so there are no hidden fees.
Repayments are made based on the percentage of card payments. Either each day, week, or month, the lender will automatically take their repayments from the card sales provider. So your business doesn’t have to worry about keeping track of the repayments. As repayments are made proportionate to the month’s revenue, the business’ cashflow isn’t affected.
Once the loan has been fully repaid, the renewal process for a merchant cash advance is usually easy and quick, so your business could have the option to continuously advance more funds.
Pros and Cons of a merchant cash advance
Pros
- With no hidden fees, you know exactly how much you will repay
- Repayments are taken directly from the card sales provider, so the repayments take care of itself
- Proportionate repayments ease your business’ cashflow
- Easy renewal process means you could have the option to take out another loan after repayment
- Property or assets are not needed as collateral security
- Businesses with a short trading history can qualify
Cons
- Costs can be higher than a long term business loan
- Only card payments qualify for a merchant cash advance, so cash payments, invoices and bank transfers don’t qualify
- Loan size is capped at 1-2 times the business’ monthly turnover so is not suitable for businesses wanting to borrow large amounts.
How much does a merchant cash advance loan cost
With merchant cash advance lending, you won’t pay any APR or upfront fees. Instead, the total cost of the loan will be calculated by a factor rate.
A factor rate is a flat fee, quoted as a decimal number and acts as a multiplier for the loan.
For example if you want to borrow £10,000 and are quoted a factor rate of 1.2, you would calculate the total loan cost as £10,000 x 1.2 = £12,000.
Factor rates vary from 1.16 up to 1.46. The rate your business will pay is impacted by the financial health of your business, the level of risk for the lender and your business credit scores.
How to apply for a merchant cash advance loan
1. Give the background details
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You'll need to provide a few details about your business, such as what you do and what you plan to use the merchant cash advance for
2. Gather your documents
- The merchant cash advance lender will need to see a couple of documents from you such as 3-6 months of the card sales provider statements and business bank statements
3. Answer the funding questionnaire
- To put your application together, log into your Capitalise account and complete the questionnaire.
4. Send your application to 4 lenders
- One of our specialists will help you put together the application and send it to the 4 lenders most likely to approve you for a loan.
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Frequently asked questions about Merchant Cash Advance
A merchant cash advance is a short-term facility with flexilbility of terms around 4-9 months. Typically, a lender will get repaid by taking a small pre-agreed percentage of daily credit and debit card transactions until the funding has been paid back. The pre-arranged percentage works alongside the ebb and flow of your daily business sales so you only pay the lender when you get paid.
In most cases, you can receive payment in as little as 48 hours from completing our online application. Once you have submitted a funding search at capitalise.com, we’ll match your business with those lenders most likely to give you an offer. The lenders we work with specialise in Merchant Cash Advance so applications can be processed and approved very quickly.
You don’t really need much at all. Most lenders we work with will ask you to provide a proof of ID, 3 months worth of bank statements and your acquirer statements.
As a general rule, you can usually raise up to 150% of your average monthly card takings.
Yes, some lenders will offer your business a merchant cash advance as a sole trader, as long as you meet their minimum turnover and trading history requirements.
Yes, you can get a merchant cash advance with bad credit. The lender will assess the application based on the business’ turnover and monthly card sales, so businesses who have been declined for other types of business loans could get a merchant cash advance with bad credit. However it’s worth bearing in mind this could mean you are subject to a more expensive interest rate.
You could get a merchant cash advance without a credit check as some lenders will choose not to do a “hard” credit check. However as it is an unsecured loan, most lenders will do a “soft” check on a business to see if there is any serious adverse credit information.
Yes, a merchant cash advance can help grow your business. By giving your business access to cash, you could invest funds into areas to help expand your business.
Getting a merchant cash advance will not have a direct impact on your credit score, as long as you don’t default on the loan. A lender will likely run a credit check as part of your application, but this will not hurt your credit score. Only if your business defaults on the loan will this have a negative impact.