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What Is a Merchant Cash Advance?
A merchant cash advance is a type of short-term funding available to businesses that accept debit card payments. With a merchant cash advance, companies can receive an upfront lump sum for a portion of their future credit and debit card sales.
Merchant cash advances can be a helpful way for businesses to access funding for short-term needs, such as inventory purchases or emergency repairs. Merchant cash advances can come with higher costs than other types of financing, so it's important to compare options and understand the terms before signing up for one.
Through a merchant cash advance, businesses who use card terminals can receive upfront funds for a portion of their future sales.
Who is Eligible for a Merchant Cash Advance in the UK?
The main criteria for getting approved for a merchant cash advance is that your business uses card terminals to take payment. You repay the funds to the lender through a percentage of your future card sales.
Other merchant cash advance requirements to consider include your business's credit score, time in operation, and average monthly sales. Some lenders may require collateral, such as equipment or real estate.
You are more likely to be approved with Love Finance for a merchant cash advance if you have been trading for at least three months and make over £2,000 in monthly credit card sales.
How Does a Merchant Cash Advance Work?
With a merchant cash advance loan, businesses sell a portion of their future credit and debit card sales in exchange for an upfront lump sum of cash. The provider then collects a fixed percentage of the business's daily credit and debit card sales until you repay the advance.
For example, if a business receives a £10,000 merchant cash advance at a rate of 10% of daily credit card sales. If the business averages £1,000 in credit card sales daily, the provider will collect £100 each day until the advance is repaid. This process could take any amount of time from a few months to a few years, depending on the size of the advance and the business's average daily credit card sales.
The business automatically pays its merchant cash advance, daily or weekly, through its credit card sales.
Repayment terms for merchant cash advances typically range from 6 to 18 months. The repayment amount generally is a fixed percentage of your daily or weekly credit card sales, so if your sales are slow, your repayment amount will be lower.
The amount you repay is based on how much you make in credit card sales from your customers.
What Are the Benefits of a Merchant Cash Advance?
Quick access to capital
A merchant cash advance for small businesses can be approved and funded much faster than a traditional bank loan, which can be helpful if you need funding quickly for an unexpected expense or emergency repair.
No fixed payments
With a merchant cash advance, businesses only have to pay back what they've borrowed when they make sales, so there's no fixed monthly payment. This can be advantageous for businesses that have irregular or seasonal sales.
Merchant cash advances don't necessarily require collateral, making them easier to qualify for than other funding, such as a bank loan.
Merchant cash advances can give you quick access to funds but they often have short repayment terms.
What Can You Use a Merchant Cash Advance For?
Your business can use a business cash advance for a variety of business expenses, including:
- Inventory purchases
- Equipment repairs or replacements
- Advertising and marketing campaigns
- Working capital
- Expansion costs
Examples of Businesses That Could Use a Merchant Cash Advance
Retail businesses that take payment by card could use a merchant cash advance to finance inventory or expansion.
Restaurants could use a merchant cash advance to cover the cost of ingredients, equipment, or renovations.
Service businesses such as plumbers or electricians could use a merchant cash advance to finance emergency repairs.
A merchant cash advance can be a great option for retail businesses that need extra cash flow.
How Do I Compare Merchant Cash Advance Providers?
There are a few key things to compare when shopping for a merchant cash advance for SMEs:
Compare the fees charged by different companies to determine the most competitive rates.
Look at the repayment terms offered by each company to see who has the most extended terms available.
Make sure you understand the qualifications required by each company in order to avoid being surprised by hidden requirements.
Some merchant cash advance companies offer additional features or benefits, such as flexible repayment terms, early repayment discounts, or 0% introductory rates. These can be helpful if you're looking for a more customised financing solution.
When looking into a merchant cash advance loan, it's important to compare different providers to find the most suitable option for your business.
How to Apply for a Merchant Cash Advance in the UK?
When applying for a merchant cash advance, you must complete an application and provide some documentation, including your last three months' bank statements and your most recent processing statement. Once your application is approved, you will receive an offer outlining the terms of the funding.
Make sure to compare merchant cash advance lenders to find the best option for you.
How Much Can I Borrow with a Merchant Cash Advance?
The amount you can borrow with a merchant cash advance will depend on your credit card sales. With Love finance, you can borrow up to double your monthly credit card sales.
What Are the Risks Associated with a Merchant Cash Advance?
The most considerable risk associated with merchant cash advance loans is that they are only a short-term funding solution. If your business doesn't have a strong history of credit card sales, you may not be able to repay the loan. Additionally, because you repay merchant cash advances through automatic deductions from your credit card sales, if your sales are slow, you may be unable to make your repayment amount.
It may be seen as a risk to engage in short-term funding such as a merchant cash advance but if you manage your cash flow effectively it should not detriment your business finances.
Alternatives to a Merchant Cash Advance
If you're not eligible for a merchant cash advance or looking for a longer-term funding solution, several alternatives are available, such as business loans, lines of credit, or invoice financing.
Difference Between a Merchant Cash Advance and a Business Loan
The repayment structure is the most significant difference between a merchant cash advance and a business loan. With merchant cash advance loans, you repay with a fixed percentage of your daily or weekly credit card sales. If your sales are slow, your repayment amount will be lower. On the other hand, business loans have fixed monthly payments, so even if your sales are slow, you'll still need to make the same monthly payment.
If you make most of your sales through card terminals, a merchant cash advance is likely the most suitable option for your business.
Merchant cash advances can be a sound financing option for businesses with a strong credit card sales history. However, comparing different providers is vital to find the most competitive rates and terms. Additionally, because merchant cash advances are repaid through automatic deductions from your credit card sales, you must ensure your business can consistently generate enough sales to meet your repayment obligations.
If you're thinking about getting a merchant cash advance to grow your business' potential and maximise your cash flow, contact us now. Our team of knowledgeable account managers can guide you through your options, and provide you with the fast, flexible funding you need to flourish.