What is a Merchant Cash Advance?
A merchant cash advance (also known as merchant funding) allows businesses to access quick funding in exchange for a portion of their future sales. In an MCA agreement, only credit/debit card-based revenue is considered when calculating a business’s eligibility for the advance, meaning cash sales are excluded from the process altogether.
MCA repayments are automatically deducted from the card sales either on a daily, weekly or monthly basis. The repayment amount is not fixed and varies with the volume of card sales during that time to adjust to a business’s cash flow. However, this repayment flexibility often contributes to making MCA a more expensive financing solution than typical loans.
Next, we will explore the workings of merchant cash advance in detail and compare its advantages and disadvantages to help you decide whether MCA is the right financing solution for your business needs.
How does a merchant cash advance work?
Here is how a merchant cash advance works for businesses, explained in a detailed step-by-step process:
- Application process: A business looking for quick capital starts by applying for an MCA. The provider reviews the application to determine the advance amount and the business’s ability to repay it. Depending on the provider, the eligibility requirements can look different. However, almost all of them strictly consider the business’s card sales history during evaluation. So, preparing these financial details in advance can make the process smoother at the time of application. The approval is typically quick for businesses in the UK, with many providers offering same-day funding.
- Receiving MCA advance: At this step, the MCA provider concludes its evaluation process and offers the agreement with its relevant details. The offered advance amount can typically range from £5000 to £400,000. The range depends on the business’s card sales analysis, size, industry, and a soft credit check. If the business agrees with the terms, the contract is finalised. Otherwise, it can also negotiate the advance amount with the provider to find a middle ground acceptable to both parties.
- Repayment of the funds: The business agrees to pay a fixed percentage of its daily or weekly card sales until the advance and the fees are fully repaid. Paying on a percentage basis allows it to pay more on a busy day with high transaction volume and less on a slow business day. Oftentimes, the providers automatically deduct the repayments from the card transactions.
- Factor rate: The factor rate is the fee charged by the MCA provider for its service, which decides the total repayment amount. For example, a factor rate of 1.3 means that for every £1 borrowed, the business will repay £1.30.
According to Gov.uk, SMEs can easily get £10,000 to £400,000 worth of Merchant Cash Advance in the UK.
Example of a merchant cash advance
Consider a small UK-based restaurant needing £50,000 to renovate its dining area. It opts for an MCA.
- The provider offers a £50,000 advance rate.
- Daily repayment percentage is 12% of card sales.
- The factor rate is 1.3.
If the restaurant’s daily card sales vary from £2000 to £3000, the daily repayment will range from £240 to £360. However, the total cost of the MCA also includes the fee. With a 1.3 factor rate, the restaurant will end up repaying £65,000 in total.
Do you need a Merchant Cash Advance?
Advantages & Disadvantages of a Merchant Cash Advance
| Pros | Cons |
|---|---|
|
No personal liability |
Can be expensive |
|
Flexibility and ease of funding |
Regular repayments can dent cash flow |
|
No long process involved, nor any collateral needed |
Lack of regulation |
|
Quick access to cash with no restrictions on fund usage |
|
Advantages of a merchant cash advance
1. No personal liability
MCA typically does not require the business to provide security or collateral. The risk of late payments, non-payments or MCA defaults is all determined based on the business’s financial history. This structure means that the agreement does not put the owner’s personal assets at risk, and there is usually no personal liability involved.
2. Flexibility and ease of repayments
Merchant cash advance lenders accommodate each business’s repayment flexibility in the contract. The repayments are usually calculated as a percentage instead of demanding a fixed daily or weekly amount. This helps the business to match the repayment funds to its current cash flow.
3. Quick access to funds
Merchant cash advance providers in the UK offer competitive funding speeds for businesses and transfer funds within 24-48 hours after application approval. This makes MCA a suitable option even for businesses facing short deadlines. This instant access to capital can help cover any urgent financial expenses at once.
4. No collateral needed
Traditional bank loans often require physical collateral like property, inventory or equipment as security against the loans. If the borrower defaults, the ownership of these assets gets transferred to the lender to recover the money. However, with an MCA, typically no collateral is required.
5. No restriction on how funds are used
Once the business receives the MCA funds, it can allocate the capital based on its needs. The advance could be used for employee payroll, purchasing inventory, investing in a new product, or launching a marketing campaign. This flexibility allows businesses to address their priority expenses without being limited by strict spending conditions.
Disadvantages of a merchant cash advance
1. It can be expensive
One of the primary disadvantages of a merchant cash advance is its high cost. The factor rates associated with MCAs are often higher than the interest rates on traditional loans, sometimes equating to an annual percentage rate (APR) of 40% to 90%.
This high cost is due to the risk that lenders take when providing unsecured funding, especially to businesses with poor or inconsistent revenue streams.
2. Lack of regulation
Merchant cash advance is a relatively unregulated market. Unlike bank loans, which are subject to strict federal and state regulations, MCAs fall into a legal grey area. This lack of regulation means the MCA providers have more freedom in setting terms and conditions, which can become unfavourable for the business.
3. Regular payments can dent cash flow
Since repayments are automatically deducted from daily or weekly credit card sales, the business’s available cash flow can be reduced, especially when the business is slow. This constant outflow of funds can strain a business’s day-to-day operations.
With traditional loans, you have to pay yearly or monthly instalments, but the frequency fluctuates in the case of MCA, which can make financial planning more challenging.
Who should consider a merchant cash advance?
Merchant funding can be a valuable financing option for specific types of businesses.
1. Businesses with high credit card transactions
Businesses that process a significant volume of credit card transactions are well-suited for MCAs because the repayments are directly linked to the volume of card transactions. This includes businesses like restaurants, retail stores and even online businesses.
2. Businesses in need of quick cash
It’s also beneficial for businesses requiring immediate cash. The application and approval process is much faster than that of traditional loans. This quick turnaround is ideal for businesses facing urgent financial needs, which can include unexpected expenses or taking advantage of an investment opportunity.
3. Businesses with poor credit
Businesses with a poor credit history will face challenges in receiving traditional financing options like accounts receivable factoring and bank loans. Learn in detail about how to get a bad credit merchant cash advance in the UK. MCAs don’t require a strong credit score for approval, which makes them accessible to businesses that have been turned down by banks or other financial lenders. You can even get an MCA with no credit check.
4. Seasonal businesses
Seasonal businesses like tourism that experience fluctuating revenues can benefit from the flexible repayment structure of an MCA. Because they have to repay with a percentage of credit card sales, they will pay a smaller amount in slow seasons and a greater amount in profitable seasons.
Want to avail the benefits of an MCA? Explore Top MCA Options With ComparedBusiness UK
ComparedBusiness UK can help you secure Merchant Cash Advance funding from the top UK vendors. Just submit your requirements in less than 2 minutes, and we will match you with the top MCA providers in the UK. You can pick and choose the best option as per your business requirements.
FAQs
Yes, even the businesses with poor credit can access MCAs because providers focus more on the volume of card sales rather than credit history.
No. You can use MCA funds for any business purpose, including marketing, inventory, payroll, or renovations. There are usually no restrictions imposed by the provider.
A merchant cash advance is different from a traditional business loan in many ways. The major difference is the eligibility criteria for both; an MCA provider usually performs a soft credit check to analyse the financial history of a business, unlike traditional lenders who perform extensive hard credit checks. Another key difference is that traditional business loans typically require providing collateral for security against the loan, while it’s not the same with MCA. No collateral on personal liability is involved with a merchant cash advance.
