Through the lifetime of your business, you may need quick access to funds to help you scale, meet payroll, or handle unexpected expenses.
A merchant cash advance offers a flexible form of business finance to provide a cash injection for urgent business needs, offering immediate financial support with flexible repayment options.
What Is a Merchant Cash Advance?
A Merchant Cash Advance (MCA), also known as a business cash advance, is a flexible and fast business finance solution designed to help businesses access capital quickly without fixed repayment terms.
As an alternative funding solution, MCAs are designed to avoid hidden costs, offering transparency compared to a traditional business loan.
Unlike traditional loans, MCAs allow businesses to secure a cash advance in exchange for a portion of future card sales, and offer a repayment structure that adjusts to fluctuations in revenue.
How Does a Merchant Cash Advance Work?
One of the key attractions of an MCA is that repayments are based on your monthly card sales, as opposed to fixed monthly payments.
This makes the merchant cash advance a more flexible option than a standard business loan. Here's how it works:
- You receive a lump sum upfront in return for a pre-agreed percentage of your future card sales
- The MCA provider collects this repayment percentage, which typically ranging from 5% to 15%, from your daily or weekly business sales at the point of sale
- Repayments are made by automatically deducting this percentage from sales until the advance and fees are fully repaid
- This repayment mechanism is directly linked to your business sales, so if your sales fluctuate, your repayment amount adjusts accordingly
- For example, if debit and credit card sales are down for a month, then your repayments also decrease. This makes cashflow fluctuations less of a headache to handle
- Unlike a traditional business loan, MCAs do not have fixed terms or fixed monthly repayments, offering greater flexibility for businesses with variable sales
What Can I Use a Merchant Cash Advance For?
As your business grows, you may find yourself in need of addtional finance to help with a wide range of strategic and operational needs.
A merchant cash advance can be used for any business purpose. Some common uses for an MCA include:
- Stock purchases: you can use the funds to buy stock in bulk, re-stock popular items, or invest in new products to expand your business offering
- Equipment upgrades: Upgrade outdated equipment or invest in new technology to improve efficiency, productivity, and the quality of your products or services
- Working capital: An MCA can provide operating capital to cover day-to-day expenses, such as rent, utilities, payroll, and supplies, during times of slow sales or seasonal fluctuations
- Marketing and advertising: You can use the funds to boost your marketing efforts with an MCA by launching new advertising campaigns, improving your website, or attending industry events to attract more customers
- Expansion and renovation: Use the funds to expand your business, whether opening a new location, renovating your current space, or adding new services to meet customer demand.
- Emergency expenses: An MCA can provide quick access to funds for unforeseen expenses, such as repairs, legal fees, or other emergencies
What Types of Businesses Can Benefit From a Merchant Cash Advance?
A Merchant Cash Advance (MCA) is most suitable as a financing solution for small and medium sized businesses operating in sectors like hospitality, retail, and leisure, especially those with significant credit or debit card sales revenue.
Here are some types of businesses that might benefit from an MCA:
- Retail shops: Retail businesses, such as clothing shops, electronics shops, and speciality boutiques, typically have a high volume of credit card transactions, making them suitable candidates for an MCA
- Hotels, restaurants and bars: Hotels, restaurants, cafes, and pubs and bars also tend to have a high volume of credit and debit card sales, making an MCA a viable financing option for managing cash flow or investing in growth
- Hairdressers & beauty salons: Hairdressing businesses, beauty salons, pet care salons and other personal care businesses often rely on credit card transactions, making them eligible for an MCA to fund equipment upgrades, expansion, or marketing efforts
- E-commerce businesses: Online retailers that process many credit card transactions can benefit from an MCA to support stock purchases, website improvements, or online marketing campaigns
- Motor vehicle services: Garages, tyre fitting businesses, and other motor vehicle service providers with a significant portion of their revenue from credit card sales might find an MCA helpful for equipment purchases or facility improvements
- Seasonal businesses: Businesses with fluctuating sales, such as travel agents, tourism-related ventures or seasonal retailers, can use an MCA to manage cash flow during slow periods or invest in growth opportunities during peak seasons
- Healthcare providers: Dentists, physiotherapists, chiropractors, and other healthcare providers who accept credit card payments may benefit from an MCA for equipment upgrades, office renovations, or marketing efforts
Small and medium sized businesses operating in these sectors can access funding quickly through MCAs, even when traditional financing options are limited.
What Are the Minimum Requirements to Qualify for an MCA?
The minimum requirements to qualify for a Merchant Cash Advance (MCA) can vary among providers, but there are some standard criteria that most providers will consider when evaluating your application.
Providers will assess your business performance, including cash flow and sales revenue, to determine eligibility and repayment capacity.
These typically include:
- Business age: MCA providers usually require your business to be operational for a minimum period, often three months to one year or more, to demonstrate financial stability and a consistent revenue stream
- Credit card sales volume: Since an MCA is based on your business's future credit and debit card sales, providers require a minimum level of monthly card sales to ensure you can repay the advance. This amount can vary but generally ranges from £2,500 to £5,000 or more per month
- Industry type: Some MCA providers may have restrictions on the types of industries they serve. They might avoid businesses in sectors with high volatility, high risk, or inconsistent revenue
- No active bankruptcies: Most cash advance providers will not approve an application if the business owner has an active default
- Business bank account: You'll need an active account to receive the advance and facilitate repayments
- Documentation: MCA providers will typically require various documents to assess your business's financial health, such as business bank statements, credit card processing statements, and identification
It's important to note that each MCA provider may have slightly different eligibility criteria, and some may be more flexible than others.
How to Apply for a Merchant Cash Advance
We always recommend speaking to an independent business finance advisor about your circumstances to ensure you receive the best form of finance for your needs.
You can choose to apply directly with direct lenders, or work with merchant cash advance brokers such as Clifton Private Finance.
Our expert brokers will help to connect your business with the most suitable MCA providers and guide you through the funding process.
- Application: To start the process, a business owner applies for an MCA with a provider, submitting information about their business and card sale volumes.
- Approval: The MCA provider reviews the application, assessing the business's financial health and debit & credit card sales to determine eligibility.
- Funding: Once approved, the MCA provider transfers the agreed-upon amount to the business's bank account, typically within 24-48 hours.
- Repayment: The MCA provider collects a fixed percentage of the business's daily or weekly card sales, continuing until the advance and fees are repaid.
What is the Difference Between a Loan and a Merchant Cash Advance?
While standard business loans and MCAs provide UK businesses with funds, there are some key differences in how they work:
- Repayment: With a bank loan, you typically receive a fixed loan amount and make fixed monthly repayments. Bank loans may also require a secured loan, meaning you must provide assets as collateral. In contrast, an MCA is paid back through a percentage of daily or weekly debit & credit card sales. This flexible repayment structure can be advantageous for businesses with fluctuating sales
- Approval Process: Loans often require good credit scores and collateral, while MCAs typically have a more lenient approval process, focusing on the business's card sales instead of credit history
- Interest Rates: Loans usually have fixed interest rates, while MCAs come with factor rates, which can make them more expensive
- Funding Speed: MCAs are known for their quick approval and funding process, while loans can take days or weeks to approve
What to Consider Before Getting a Merchant Cash Advance
It is crucial to evaluate your business's financial health and consider alternative financing options before deciding on a merchant cash advance.
Here are some key points to think about:
Assess Your Cash Flow
Analyse your business's cash flow to ensure you can handle an MCA's daily or weekly repayments. If your business experiences significant fluctuations in sales, an MCA's flexible repayment structure might be beneficial.
However, other financing options might be worth considering if you're concerned about managing repayments during slow periods.
Compare the Cost of Alternative Financing Options
Although MCAs can provide quick access to capital, they tend to be more expensive than traditional loans. Before committing to an MCA, explore alternative forms of business funding.
Review the MCA Provider's Reputation and Customer Reviews
Research the MCA provider and read online customer reviews to ensure they are reputable, reliable and have a good customer service history.
Look for providers with a proven track record of helping businesses in your industry and who offer transparent pricing and terms.
Seek Professional Advice
Consulting with your business accountant can provide valuable insight into whether an MCA suits your business.
They can help assess your financial health, review MCA terms, and suggest alternative financing options.
Overall Cost of a Merchant Cash Advance Facility
Several factors can affect the cost of a business cash advance, including:
- The advance amount
- The factor rate
- The business's daily debit and credit card sales
What a Business Might Pay for an MCA Facility: Illustrative Example
Suppose a shop owner needs an MCA of £20,000 to invest in stock and an online marketing campaign. The MCA provider offers the funds with a factor rate of 1.25.
To calculate the total repayment amount, the advance amount is multiplied by the factor rate:
The total repayment amount for the MCA would be £25,000.
Let's assume the retail shop's average daily credit card sales are £1,000. The MCA provider sets a retrieval rate of 10% for the repayments.
To calculate the daily repayment amount, the average daily credit card sales are multiplied by the retrieval rate:
The shop owner would repay £100 daily until the total repayment amount of £25,000 is reached.
To calculate the approximate duration of the repayment, the total repayment amount is divided by the daily repayment amount:
In this example, the retail shop owner would repay the MCA in approximately 250 days.
Keep in mind that the repayment duration may vary due to fluctuations in daily debit or credit card sales.
What is the Factor Rate Used By a Merchant Cash Advance Provider?
A merchant Cash Advance (MCA) provider uses a factor rate, which is a multiplier that determines the total cost of the advance.
It expresses the cost of borrowing instead of an interest rate, as with a traditional business loan.
The factor rate typically ranges from 1.1 to 1.5, depending on the provider, the borrower's perceived risk, and other factors such as the duration of the advance and the industry. A higher factor rate indicates a higher cost for the MCA.
To calculate the total repayment amount, the advance amount is multiplied by the factor rate:
Total Repayment Amount = Advance Amount × Factor Rate
For example, if a business owner receives an MCA of £10,000 with a factor rate of 1.3, the total repayment amount would be:
£10,000 × 1.3 = £13,000
In this example, the business owner must repay £13,000 for the £10,000 advance.
Is a Merchant Cash Advance a Good Option For My Business?
Whether an MCA is a good idea for your business depends on your circumstances.
MCAs can be attractive for businesses with:
- Seasonal fluctuations in revenue
- The need for quick access to funds
- Poor credit scores
It's essential to weigh the pros and cons before committing to an MCA.
Merchant Cash Advance Pros
- Fast funding process: Cash advances can provide businesses with funds within 24-48 hours.
- No collateral required: MCAs are unsecured, meaning you won't need to put up assets as collateral.
- Flexible repayment structure: The repayment amount adjusts based on your card sales, providing flexibility during slow periods.
Merchant Cash Advance Cons
- Higher costs: MCAs have higher factor rates than traditional business loans, which can make them more expensive in the long run.
- Potential cash flow issues: The daily or weekly repayment can strain a business's cash flow, especially during slow periods.
- Debt cycle risk: Some businesses may find themselves taking on additional MCAs to repay existing ones, leading to an unhealthy cycle of debt that can be challenging to break.
Watch our case study video below on how we secured a £50,000 Merchant Cash Advance for a family-run cafe:
What is the Maximum Amount For a Merchant Cash Advance?
The maximum amount for an MCA depends on your business's monthly debit or credit card sales.
Typically, MCA providers will offer an advance of up to 250% of your monthly credit card sales.
For example, if your business processes £10,000 per month, you could be eligible for a cash advance of up to £25,000.
The maximum merchant credit advance will also depend on the provider's terms and your business's financial health.
Is Merchant Cash Advance Safe?
Yes, MCAs are a legitimate and safe financing option. However, as with any loan, they can be risky for some businesses.
This is why we always recommend speaking to an independent advisor about your situation before signing any contractual agreement.
At Clifton Private Finance, our expert business finance brokers can help you find the best solution for your needs.
What Happens if You Default on an MCA?
The consequences can be severe if you default on a merchant cash advance facility. The MCA provider may:
- Take legal action to recover any outstanding funds owed. Delegate the debt collection to a collection agency, which could harm your credit rating
- Place a lien on your business's assets or seize them to recover the debt
It's crucial to understand the MCA terms and conditions and plan to manage the repayments before accepting the funds.
Can I Get a Same-Day Merchant Cash Advance Facility Setup?
Yes, in some cases, a same-day Merchant Cash Advance (MCA) facility can be set up.
MCA providers are known for their relatively quick approval and funding processes compared to traditional funding lines. Some providers can approve an application and provide the funds within 24 hours or even on the same day.
However, the speed of approval and funding can depend on several factors, including:
- The MCA provider's specific processes and requirements
- The completeness and accuracy of the application and supporting documentation
- The volume of credit and debit card sales your business generates
To increase the chances of obtaining a same-day MCA facility, ensure you have all the required documentation and information readily available, such as business bank statements, credit card processing statements, and identification.
Additionally, it's essential to research and select a business cash advance provider known for its fast approval and funding times.
When selecting an MCA provider, remember that the speed of funding is not the only factor to consider.
Whilst speed may be a primary consideration, you should also carefully evaluate the costs, terms, and repayment structure to ensure the MCA facility suits your business's needs.
Can I Keep My Existing EPOS Card Machine When I Take Out an MCA?
When you take out a merchant cash advance (MCA), you can often keep your existing Electronic Point of Sale (EPOS) card machine.
However, this will depend on the specific MCA provider and their requirements.
Some MCA providers are flexible and can work with your existing card terminal machine, allowing you to continue processing credit and debit card transactions as usual.
In this scenario, the MCA provider will collaborate with your current card processor to set up the agreed-upon retrieval rate for repaying the advance.
On the other hand, certain MCA providers may require you to switch to their preferred card processing system or use their EPOS card machine to ensure seamless repayment of the advance.
This may involve additional setup, transition time, and potential costs of changing card processors or equipment.
Before committing to an MCA, it is essential to discuss your existing EPOS card machine situation with potential MCA providers and understand their specific requirements.
Secure a Merchant Cash Advance with Clifton Private Finance
Merchant Cash Advances are a viable financing option for businesses with strong credit card sales and a need for fast access to capital.
Our expert business finance advisors can take an independent view of your business, its needs, and help you to weigh up the associated costs, risks, and repayment structure.
We can help you meet tight deadlines with a fast and professional merchant cash advance service.
