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What is Merchant Funding (2024 Guide)

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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

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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.

Feature Merchant Financing Traditional Bank Loan
Type of Financing
Purchase of future sales
Loan of funds
Flexible Repayments
Security Assets Required
Fixed Term
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.

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.

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.

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.

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.
  • 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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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.

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.