How do merchant cash advances work?

If you’re a small or medium-sized business and accept credit card payments, a merchant cash advance might be just what you need for an extra cash injection. Instead of waiting for credit card companies to pay you, you can get an advance on these payments ranging from £5,000 to £50,000 and provide much-needed cash flow to your business.

TechRound has put together this guide to show you what Merchant Cash Advances are and how you could get the most out of them for your business!

What is a Merchant Cash Advance?

A merchant cash advance is a way for businesses to receive cash in advance of future credit card sales. It is most popular with retailers, restaurants, and hotels that constantly accept credit card payments as part of their business.

Often credit card payments can take 30-90 days to clear and get paid to the retailer, which means there can often be a lack of cash for the brand. This is where merchant cash advances come in, it means you can receive some of the credit card payments you expect.

This payout often ranges from £5,000 to £50,000 and you can use this money for anything you might be struggling with. This may include staff compensation, stock purchases, or any other business expense.

The process is extremely simple, the money is paid to you in advance. Although a tiny percentage of the money is taken as payment to the lender, it is collected and processed by your own credit card machine, so you don’t have to worry about it.

How much does a merchant cash advance cost?

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

It is a very low-cost form of financing because the repayment plans are based on the expected sales of each individual business.

Is my business eligible for a merchant cash advance?

It is important to note that there are a few eligibility criteria to ensure your business is eligible for a merchant cash advance. These are quite simple and most UK businesses will qualify for these types of loans.

To be eligible for a merchant cash advance:

  • You must have a UK limited liability company carrying on business in the UK
  • Business has been in business for at least 6 months (some lenders may require 2 years of 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 on your expected sales as a business and not your personal credit score or loan repayment history.

Which Companies Use Merchant Cash Advances?

Merchant Cash Advances can be used by any business that accepts credit card payments. This means that the size of the business doesn’t matter, but there are certain industries that merchant cash advances could help.

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

If the business’s main source of revenue comes from card payments, a merchant cash advance is perfect for them. These industries typically include:

  • Shops and retailers
  • grocery stores
  • Restaurants and bars
  • Hotels and B&Bs
  • Hairdressing and beauty salons
  • Fashion and clothing stores
  • E-commerce and online shops

Receiving the money in advance allows these businesses to pay for expenses they’ve been struggling to pay without going through credit card payments.

How long does a Merchant Cash Advance last?

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

In order to avoid paying additional interest, you may want this cash advance to be shorter, but you can choose to clear your account at any time if you decide to borrow longer.

What information do I need for a merchant cash advance?

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

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

In the event that you cannot repay the loan, some lenders may require you to provide personal security and 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 recognized form of loan and have been used many times before making them a safe bet if you need cash.

However, merchant cash advances can get dangerous or tricky if you can’t afford the repayments. Although small, you need to ensure that you always receive enough money from your business to repay these merchant cash advances.

Otherwise, the lender could repossess your property or that of your guarantor in order to repay the debt. Always make sure you know how and when you are paying off your debt so you don’t have repayment issues.

Are there alternatives to merchant cash advances?

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

Additionally, you can consider using 0% credit cards or borrowing from family and friends to fill the gap until you can make repayments.

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

Leslie M. Gill