Small businesses need to be agile, flexible, and to keep up with a constantly changing market. Sometimes, that means they need access to funding at short notice, and merchant cash advances can make this possible.

Whether due to seasonal highs and lows, unforeseen costs, seasonal fluctuations, or emergency circumstances, merchant cash advance can be the short-term funding they need to keep the wheels turning.

Here we explore the key features, advantages and disadvantages of a merchant cash advance to help you make the right choice for your business.

If you’d prefer to speak to someone about funding options for your business, contact us today and one of our team will be in touch as soon as possible.

What is a merchant cash advance?

A merchant cash advance – sometimes called an MCA – can be a useful short-term funding tool for small businesses that take regular debit and credit card payments.

In some cases, merchant cash advances can be an effective alternative to a small business loan. As with a loan, the lender provides businesses with a sum of money upfront. The business then pays the money back using a set percentage of its card transactions, plus any agreed fees.

For many businesses, the fact that they do not have to offer security (like assets or property) to access the funding, is a big attraction.

How do merchant cash advances work?

Here’s a quick summary of how a merchant cash advance might work in practice.

1. The lender will calculate your business’ factor rate. This is a tool in decimal form that provides them with appropriate interest rates when lending to businesses. Your factor rate will be impacted by your:

a. Small business’s industry

b. Length of time in business

c. Sales stability

d. Average monthly credit card sales

2. Based on your factor rate, the lender will lend your business a sum of money.

3. To repay the money, the lender will deduct a percentage of your business’ debit and credit card sales on either a daily, weekly or monthly basis. A typical deduction is around 10% of each transaction value.

4. This arrangement will continue until the money has been repaid in full, but as repayments are subject to your business’ sales, repayment periods can be flexible. For example, you may agree on a maximum repayment period of 18 months, but if your sales are higher than expected, you may be able to repay the loan quicker.  

Why use a merchant cash advance?

Merchant cash advances can be a helpful tool for small businesses that need access to capital to cover short-term costs, cash flow issues, or unforeseen emergencies. The cash can be used to fund:

• equipment purchases

• repairs and renovations

• marketing and advertising

• inventory purchases

• working capital

• expansion costs.

Which types of businesses use merchant cash advances?

Just about any type of small business can use an MCA if they process a high volume of card transactions. These transactions can be taken in person or online. MCAs are particularly popular in retail, hospitality, and trade businesses (electricians, plumbers, heating engineers, carpenters).

What are the advantages of using a merchant cash advance?

Quick access to funding

Setting up an MCA can be quicker and simpler than applying for a small business loan or other forms of commercial finance, as less documentation is required. In some cases, businesses can access funds within a few hours of applying.

Flexible

Merchant cash advances provide a line of credit that can be used to fund a wide range of business expenses. In addition, the repayments can be aligned with the business’ income and repaid in full earlier if possible.

Strengthen company credit

Businesses can build a line of credit that establishes a positive payment streak and improves their credit score.

Keep personal and business credit separate

Small business owners can use a merchant cash advance to strengthen the line between personal and business expenses.

What are the disadvantages of using a merchant cash advance?

Risk of accruing debt

As with any form of commercial borrowing, the repayments have the potential to impact your business’ cash flow. If you cannot make repayments, your business and other assets may be at risk.

No benefit to early repayment

Your business will agree to pay a fixed amount of fees, so there will be no savings made if repayments are made early.

Contracts can be complex

It can be difficult to understand the complexities and terms and conditions of an MCA; it’s important to seek independent financial advice before committing to any financial agreement.

Cash income not eligible

You will only be able to repay the MCA using income from card transactions. Businesses found to be incentivising customers to pay with cash (either through promotions or special offers) can be seen as a breach of repayment conditions by the lender.

High interest rates and fees

MCAs are intended as short-term funding solutions, and as such incur higher interest rates and fees than other types of commercial finance.

Possible funding alternatives to MCAs

Businesses should only use a merchant cash advance is they are confident that they will be able to repay it quickly and without difficulty. If a business is looking for a longer-term solution, other funding options are available that carry lower interest rates, such as:

• Cashflow loans

• Invoice finance

• Asset finance

Funding for your business

Bluestone is an ethical and FCA-regulated finance intermediary. We are committed to ensuring that our clients make informed financial decisions based on their requirements, and always recommend that our clients seek independent financial advice from an authorised source before committing to any financial agreements.

If you would like to explore a merchant cash advance or alternative funding solutions in more detail, get in touch using the enquiry form below. One of our friendly and experienced team will be in touch as soon as possible.

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