If your business takes customer payments through an EPOS terminal or other card electronic card reading device, then a merchant cash advance could be a useful solution for your business.
Merchant cash advances are flexible business loans allow you to borrow a lump sum of capital based on the amount of payments received through your card reader, with a small percentage of the outstanding balance repaid each time a transaction is made.
As with all forms of credit, there's no one size fits all option and so they won't be suitable for everyone. Read on to learn more about the pros and cons of a merchant cash advance and discover how this alternative form of lending could help support your business.
Advantages of a merchant cash advance
Traditional business loans are lent to borrowers over a set number of months or years with fixed monthly repayments that are calculated from the amount borrowed plus interest and fees.
Whilst some business owners may be happy to stick to fixed repayments, this can often pose a real problem for businesses which operate seasonally or see significant ups and downs in revenue throughout the year.
From manufacturing, import/export, distribution, leisure, retail and tourism, there are plenty of sectors which can identify with the challenges of fluctuating revenues.
With a merchant cash advance (MCA), your repayments are linked directly to the value of transactions taken through your card payment terminal. If you have a great month of sales then you'll pay back more, but during quieter months where your working capital is perhaps best served elsewhere, you'll pay back less.
As you're paying back your merchant cash advance each month, you may find that your borrowing requirements change, particularly if you're a growing SME.
Once a certain amount of your merchant cash advance has been repaid, most lenders will allow you to take on additional capital which can be used to help continue driving your business forwards
No fixed term
Since a merchant cash advance is repaid solely based on your EPOS terminal sales, you won't be locked into a set repayment period of months or years. This hassle-free approach can help to minimise the stress that can sometimes come with meeting fixed repayment deadlines, leaving you to completely focus on your business.
High acceptance rates
Each merchant cash advance application is underwritten and assessed based on your history of takings through your card reader. If you've been turned down for a traditional loan elsewhere, or have a poor business credit score, then this alternative method of borrowing could work in your favour since decisions are primarily made on transactions rather than credit history.
The same can also be said of businesses who are still growing their cash flow and don't meet the qualifying criteria of other loans, as well as those who have only been trading for a short period of time.
Disadvantages of a merchant cash advance
Higher rates of interest
With more and more merchant cash advance lenders coming to the UK market, there are some highly competitive interest rates available. However, merchant cash advances typically carry higher interest rates than traditional, long term loans due to the short term nature of their borrowing, as well as the added risk of providing flexible monthly repayments.
Fees and interest may apply
As with many other business loan types, interest and fees will be added to your account balance to cover the cost of lending you capital. This is calculated each month and is deducted from the amount repaid based on your recent credit and debit card takings.
Short term solution
A merchant cash advance is not typically used as a long term borrowing option but instead to help facilitate short term growth and provide a stop gap during dips in cash flow. They can also be used to take care of unexpected outgoings such as tax bills or utility payments.
Compare merchant cash advance lenders
You can quickly and easily compare these providers by taking just a few minutes to complete your Capitalise profile. Unlike other aggregator sites, we'll match your business with lenders who have experience supporting similar businesses within your sector.
You'll be able to apply to multiple lenders online with the click a button and even upload supporting documentation to help speed up your application.