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What is Merchant Finance (2024 Guide)

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.

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

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Merchant Finance vs Traditional Bank Loan

Unlike traditional loans that rely heavily on credit scores and collateral, merchant financing focuses on the business’s sales history and potential future sales. This makes it an attractive option for businesses with solid sales that may not qualify for conventional loans due to strict credit requirements.

Feature Merchant Financing Traditional Bank Loan
Flexible Repayments
Security Assets Required
Fixed Term
Quick Funding

How Merchant Financing Works?

Here is how merchant finance works for businesses:

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.

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.

ComparedBusiness Compares & Provides You With Top Merchant Finance Solutions

We at ComparedBusiness are experts in saving your time and money. Just submit your requirements in less than 2-mins and ComparedBusiness will get back to you with Quotes from a list of top Merchant Finance lenders. You can pick and choose the best option for your business.

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.

Written by:

Henry Baker
Henry Baker
Henry Baker, an adept financial & business copywriter in England, boasts a decade-long career collaborating with top-tier UK financial institutions. Renowned for his skill in translating intricate finance into captivating content, he's a trusted authority in simplifying complex concepts for diverse audiences.

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