What is a merchant cash advance for small businesses?

If you run a small business that takes most of its sales through card terminals, a merchant cash advance can provide a short-term funding option when you need quick access to cash. 

Key takeaways

• A merchant cash advance gives you a lump sum in return for a percentage of future card transaction sales and agreed fees

• You can typically borrow 1.5x your business’s monthly card sales

• Repayments fluctuate in line with your business income, so you pay more when the business is doing well and less when trading is quieter

• Applying for a merchant cash advance can be quicker than applying for a traditional business loan

What is a merchant cash advance?

A merchant cash advance, also known as a business cash advance, gives you a lump sum of cash upfront, which you repay through a percentage of your card sales. The provider automatically collects these repayments, along with any fees.

Unlike a traditional bank loan, this form of borrowing has no interest rates or fixed monthly repayments. You may also find getting a merchant cash advance quicker and more straightforward than a traditional business loan. 

How does a merchant cash advance work?

When applying for a merchant cash advance, the provider gives you an upfront payment based on how much money your business makes from card payments each month. The advance is typically 1.5x your business’s monthly card sales, often between £1,000 and £500,000.

The provider automatically collects repayments by taking a percentage of your card sales until you’ve paid back the full amount. This is in addition to the agreed fees.

Repayments fluctuate in line with your income, meaning you pay off more when business is booming and less when business is quieter. You can generally expect to repay your loan over three to 18 months. 

Read more: 

• How to manage business debt

• What are the different types of business loans? 

• Emergency business funding

What can you use a merchant cash advance for? 

You could use a merchant cash advance to cover cash flow shortages or expenses such as:

• Emergency repairs

• New equipment or inventory

• Working capital

• Marketing and advertising costs

• Paying VAT or tax bills

• Expansion of premises

How much does a merchant cash advance cost?

To calculate the cost of your loan, the lender multiplies the funding amount by the ‘factor rate’. This is set at a fixed rate per £1 borrowed and is quoted as a decimal number.   

As an example, if you borrow £10,000 and your lender quotes a factor rate of 1.1, you repay £10,000 x 1.1 = £11,000.

The rate you pay depends on your business’s financial health, credit history and industry sector, and once it’s set, it doesn’t change. 

What types of business can benefit from a merchant cash advance? 

A merchant cash advance tends to suit businesses that take most of their sales through card payments. This might include:

• Cafes and restaurants

• Retail shops

• E-commerce stores 

• Hotels

• Hairdressers

• Carpenters, plumbers or electricians

• Pubs and bars

What are the advantages and disadvantages of a merchant cash advance?

Before deciding whether a merchant cash advance is right for your business, you should weigh up the pros and cons.

Advantages

• No hidden fees: You know exactly how much you need to repay when you sign up

• Adaptable repayment plan: Repayments fluctuate depending on how well your business is doing

• Quick funding: The application process is quicker than applying for a business loan and funds can be in your business account within 24 to 48 hours

• No need to remember repayments: The merchant cash advance provider collects your repayments automatically 

• No collateral required: This is an unsecured business finance solution

• Can be easier to qualify: You don’t necessarily need good credit to apply as lenders base their decision on your card payment turnover

Disadvantages

• More expensive: A merchant cash advance tends to be more expensive than many other types of business finance

• Not suitable for  borrowing large sums: Your loan size is usually capped at 1 to 2 times your monthly turnover

• Only card payments qualify: You can’t include cash payments, invoices or bank transfers

• No benefit to repaying early: You won’t save money by clearing the debt early as you pay a fixed fee on your loan

How to apply for a merchant cash advance

If you decide to apply for a merchant cash advance, you typically need to fill in an online form, providing details about your business, such as the type of business you run and what you wish to use the funds for.

You also need to provide documents such as three to six months’ worth of card sales provider statements and bank statements. 

Once the lender approves your application, you receive an offer explaining your funding terms and you receive the funds in your business bank account. 

Merchant cash advance alternatives

There are plenty of alternative sources of funding to explore if a merchant cash advance isn’t right for your business:

Invoice finance

If your business regularly invoices clients, invoice finance enables you to borrow up to 95% of your unpaid invoices in advance. You typically receive funds within 24 to 48 hours. 

Revolving credit facility

A revolving credit facility allows your business to borrow money flexibly by withdrawing credit as needed. You usually make your repayments each day, week or month, and once you repay the amount borrowed, you can often withdraw the funds again when required.  

Business loan

A business loan lets you borrow a lump sum of cash that you then repay in monthly instalments over a set term, with added interest. You could use the funds from the loan to pay bills, employee salaries or expand your business.

Asset finance

If you need access to equipment, machinery or vehicles, but can’t afford to pay for them upfront, asset finance enables you to pay for them in instalments. Depending on the agreement type, at the end of the term, you might own the asset outright, return it, or have options to purchase or renew it.

Cash flow loan

A cash flow loan is a type of short-term financing that allows businesses to borrow money based on their expected future cash flow. It’s designed to cover temporary shortfalls in your business’s cash flow.