What is Merchant Funding?
Merchant funding (also called MCA funding or merchant cash advance) is an easy and quick way to finance your business without taking a traditional bank loan. Merchant funding allows you to access funds against your future card sales. It is designed for businesses that accept card payments. The amount of funds depends upon the volume of your monthly card transactions. Repayments are collected as a fixed percentage of each future sale until the advance is fully settled.
Who can Apply for Merchant Funding?
This type of funding is prevalent among small to medium-sized businesses that have significant credit card sales volume but may not qualify for traditional loans due to credit issues or the need for faster access to funds like:
- Restaurants and Bars
- Retail Stores
- Beauty Salons and Spas
- Automotive Repair Shops
- Medical Practices
- E-commerce Businesses
- Fitness Centers and Gyms
Learn whether you are eligible for merchant funding in our small businesses guide to Merchant Funding.
We can Help you Compare Merchant Fianance quotes Today
Merchant Funding 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.
Here’s how merchant funding is different from a traditional bank loan:
| Feature | Merchant Financing | Traditional Bank Loan |
|---|---|---|
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Type of Financing |
Purchase of future sales |
Loan of funds |
|
Flexible Repayments |
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|
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Security Assets Required |
|
|
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Fixed Term |
|
|
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Quick Funding |
|
|
How does Merchant Funding Work?
Here is how merchant funding works for businesses:
Applying for funding
The eligibility for merchant funding 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 funding within a couple of days. With some providers, you can also get the funds within 24 hours.
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 Funding
The factor rate is the premium charged by a merchant funding lender. It is determined by the merchant funding provider & receiver at the time of agreement. It remains fixed until the advance is repaid. It is set at fixed pennies per pound on the advance taken. For example, a factor rate of 1.2 or 20% means that for every £1000 borrowed, you pay back £1200 from your future card sales.
| Amount | Repayment terms | Application Speed |
|---|---|---|
|
£5,000 - £500,000 |
Flexible usually 5% - 15% of card sales |
24-48 hr approval |
Key Benefits Of Merchant Funding
Merchant funding offers a lot of benefits for businesses as:
Access Funds Quickly
Unlike traditional loans, which can take weeks or months to process, MCA funding can provide businesses with the needed funds in a matter of days. This is crucial for businesses that require immediate capital to manage unexpected expenses or to continue operating during temporary funding shortages.
No Security Assets Required
MCA funding does not require collateral, making it accessible to businesses that do not have significant assets to secure a loan or prefer not to risk valuable assets. This reduces the risk for the business owner.It is also quite beneficial for businesses with a bad credit history, since Merchant Funding providers perform a soft credit check to see if you are eligible for the funds.
Flexible To Your Needs
The repayment terms of merchant funding are directly tied to a business’s sales volume, offering a level of flexibility not typically found in traditional loans. As the repayment is based on a percentage of a business’s sales, you pay more when sales are high and less when sales are lower.
Transparent Fees
MCAs provide a clear and straightforward fee structure through the use of a factor rate, which is agreed upon at the time of funding. This rate determines the total repayment amount, offering transparency in the cost of merchant funding.
Increase Cash Flow
By providing immediate access to capital, MCAs can significantly enhance a business’s cash flow. This immediate cash can be utilised for several things, such as marketing campaigns, equipment upgrades, or expansion projects, all of which can assist in boosting revenue and business growth.
Reduce Bad Debt
Since repayment of merchant funding is based on future sales, there’s no fixed monthly payment that could strain the business’s finances. This approach helps businesses manage their debt more effectively and reduces the risk of accumulating bad debt—a situation where the debt becomes difficult to repay due to high fixed payments or unfavourable terms.
Major Drawbacks of Merchant Funding
Merchant funding can be a useful option for quick cash, but it also comes with some drawbacks that you should be aware of:
1. Higher factor rate
The factor rate in merchant funding can be quite high. This rate determines the total amount you’ll repay. For example, if you borrow £1000 with a factor rate of 1.2, you’ll end up repaying £1200. High factor rates mean that the cost of borrowing is higher as compared to traditional loans.
2. Deductions only from card payments
One key drawback of merchant funding is that repayments are deducted only from your card sales. If your business deals in a mix of payment methods—like cash, checks, or online transfers—merchant funding might not be ideal. This is because you’ll only be repaying based on the card transactions you make. So, if you don’t process a significant amount of card sales, it could take longer to pay off the advance.
3. Less predictable repayments
Another challenge with merchant funding is the unpredictability of repayments. Since repayments are a percentage of your daily card sales, the amount you pay back each day fluctuates. On busy days with high sales, you’ll pay more, but on slower days, your payments will also be lower. This unpredictability can make it hard to manage your cash flow for future expenses.
4. Changes in repayment terms
Repayment terms in merchant funding can fluctuate based on your sales volume. This means that as your sales go up or down, the amount you repay can change accordingly. That is why it is crucial to work with a reputable lender and review the terms of the contract to avoid any surprises.
5. Impact on profit margins
Merchant funding can also impact your profit margins. As mentioned earlier, the cost of borrowing through merchant funding is higher compared to traditional loans. The daily percentage taken from your card sales adds up, which can reduce your overall profit. For businesses with tight profit margins, this extra cost can have a major impact on overall revenue generation.
How to Compare the Best Merchant Funding Providers?
When searching for the best merchant funding (or MCA) deals in the UK, it’s important to consider several factors.
- Compare the factor rates offered by different lenders to ensure that you’re getting a good deal. We have shortlisted the top Merchant Funding providers in the UK.
- 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 funding, 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.
Since factor rate depends upon the business credit rating, volume of credit card sales, and profitability. A higher factor rate indicates that the merchant funding provider associates higher risk with your business.
Yes. Although they aren’t loans, they are considered purchases of your future sales.
The factor rate for merchant funding and the interest rate for bank loans are different ways to figure out the cost of borrowing money. The factor rate gives you a simple, one-time cost by multiplying the loan amount, making it easy but possibly pricier. On the other hand, bank loans use an interest rate to show the cost each year, which can be lower but might include extra fees.
