What is Merchant Finance?
Merchant finance is a type of funding that refers to small-business loans for companies with physical or virtual storefronts that accept credit or debit card payments. For this, a merchant financing lender offers you funding and then collects a percentage of your daily card sales until that loan is paid back.
A merchant cash advance (MCA) is another type of financing for businesses in the UK, where a lender gives a business a cash advance in exchange for a percentage of their future sales.
Let’s see how merchant finance works for businesses:
how does Merchant Finance work?
Applying for funding
The eligibility for merchant financing mostly depends on how much the business has sold in the past—the more sales, the more it can borrow, ranging from a couple of thousand pounds to over a hundred thousand. The credit score usually doesn’t matter much here.
Getting the capital
One can typically get merchant financing within a couple of days.
Beginning to repay
The lender will take a fixed daily percentage of the business’s card sales directly, so repayment starts as soon as you start making sales.
Finishing up repayment
Though the business is paying back a bit every day, it might still take a while to pay off the whole amount, plus any fees. You will pay back more on busy days, but on slow days, you will pay back less.
Learn more about merchant finance by focusing on a specific brief scenario:
Who Can Apply for Merchant Finance?
Merchant financing lenders cater to a wide range of businesses, offering flexibility in funding amounts and repayment terms. This is especially beneficial for businesses with high card transaction volumes, such as:
- Restaurants
- Online shops
- Fast food outlets
- Pharmacies
- Grocery stores
- Bars and leisure clubs
We can Help you Compare Merchant Finance quotes Today
Merchant Finance vs Traditional Bank Loan
Merchant financing focuses on the business’s sales history and potential future sales, which is different from traditional loans that rely heavily on credit scores and collateral. This makes it an attractive option for businesses with solid sales that may not qualify for conventional loans due to strict credit requirements.
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Flexible Repayments |
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Security Assets Required |
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Fixed Term |
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Quick Funding |
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Cost of Merchant Financing
The cost of merchant financing is often determined using a factor rate. This rate is expressed as a decimal figure, which, when multiplied by the borrowed amount, indicates the total amount that needs to be repaid.
For instance, if a business borrows £10,000 with a factor rate of 1.2, the total amount to be repaid would be £12,000 (£10,000 x 1.2). It means that for every £1000 borrowed, you pay back £1200 from your future card sales. The business would pay £12,000 from its future card sales.
Pros and Cons of Merchant Financing
It’s important to consider the benefits of merchant financing against the potential drawbacks. Below, we explore the key pros and cons to help you understand if it’s the right choice for your business.
Pros
Ease of qualification: Merchant financing is accessible because lenders primarily consider your sales history rather than your personal or business credit history.
Automatic repayment: There’s no worry about missing a payment since repayments are automatically deducted from your credit card transactions.
Sales-based repayments: Repayment amounts adjust based on your sales volume, decreasing during slower business periods.
Cons
Higher cost of capital: Merchant financing can be more expensive than other small-business loan options, making it a costlier debt.
Continuous repayments: A portion of your revenue is constantly directed towards repaying your merchant financing, which can restrict your cash flow.
Dependence on specific payment types: This financing is usually tied to sales processed through a particular payment processor. Sales via other methods like cash transfers aren’t considered in your application, limiting flexibility.
How to Compare the Best Merchant Finance Providers?
When searching for the best merchant cash advance deals in the UK, it’s important to consider several factors.
- Compare the interest rates and fees offered by different lenders to ensure you get a good deal.
- Read the fine print and understand the repayment terms, as some lenders may have hidden fees or penalties for early repayment.
- It’s also important to research the lender’s reputation and customer service, as you want to work with a reliable and trustworthy company.
- Finally, consider the application process and how quickly you can receive the funds, as some lenders may be able to provide funding faster than others.
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FAQs
To be qualified for Merchant Financing, here are three basic requirements:
- Your business receives payments through card terminal machines
- A Good volume of card transactions
- Profitability to show that you can repay the loan
Yes, it’s possible to obtain an MCA or Merchant Finance with a bad credit rating. They are primarily based on the sales performance and profitability of your business rather than your credit score.
A Merchant Financing lender is a financial institution or company that provides businesses with a sum of funding based on their sales made through card transactions.
Merchant Finance is an unsecured form of lending, which means you do not need assets or a great credit rating to have the funding. This makes Merchant Finance a suitable option for small businesses.
Merchant financing does not affect your business’s credit score directly, as it is based on your business’s sales rather than your credit history. However, if you consistently miss payments or default on the loan then it can impact your credit score.
Yes, you can use merchant finance funds for any business expenses,like purchasing inventory, buying new equipment, launching a new campaign or covering scaling costs. However, it can be effective to check with your lender to make sure there are no restrictions on how the funds can be used.
If your business faces a downturn and struggles to make daily payments, you should contact your lender as soon as possible. Many lenders offer flexible repayment options or might work with you to adjust the repayment schedule based on your current financial situation.
While the costs related to merchant financing are straightforward, it’s important to read the contract carefully. Some lenders may have hidden fees, such as origination fees, processing fees, or fines for late repayment. Make sure to ask about all potential fees and review the terms and conditions thoroughly.
