Running a business, of any size and nature, eventually boils down to how well you can handle the numbers. There are, of course, the important calculations about growth and reinvestment, but, as far as the day to day operations are concerned, it’s all about managing the cashflow.
Larger businesses have it slightly easier in this regard. Bigger pockets usually ensure better credit, thereby also implying that such businesses rarely have to borrow in order to look after everyday expenses.
The same, however, cannot be said about an SME. SMEs have a whole different set of questions to answer, and the answer usually lies in how easily, how conveniently, how fast and how affordably they can borrow money. This is where alternative sources of finance come to the fore as many of them have the ability to mould themselves to the exact needs of your business.
Merchant cash advance is among the most popular alternative funding sources for UK SMEs, and we will try to take stock of its features in this article.
What Is Merchant Cash Advance?
Merchant cash advance, also known as business cash advance in many circles, is a fast, unsecured business loan that helps SMEs tackle the cashflow problems. Merchant cash advance is a cash injection that is tied to your future debit and credit card sales. In that sense, merchant cash advance or business cash advance is a good source of alternative funding for B2C SMEs.
Merchant Cash Advance Definition
Merchant cash advance is an unsecured business loan that is repaid through the future debit and credit card sales you make.
Unlike other business loans and overdrafts, there are no fixed monthly repayments to make. There is no APR to worry about either. The equation is fairly simple – the more sales you make, the faster your loan gets repaid. This also means that if you’re experiencing a particularly slow month, your repayments will be proportionately smaller.
Each merchant cash advance account is tied directly to your card terminal (point of sale). So, it’s important that a healthy share of your sales comes through debit/credit card transactions.
Merchant Cash Advance – How It Works
Merchant cash advance is inherently different from other unsecured business loans in that it is based directly on the profitability of your business. Lenders, while assessing the potential of your business, will take a close look at the performance of your business – especially the card terminal transactions. Due to this peculiarity, it becomes important to understand how merchant cash advance really works.
The Process – Take A Moment To Familiarise Yourself With How MCA Works
Merchant cash advance lets you borrow money as and when you need it – but it’s technically not really a loan (we will get down to that part shortly). For now, we suggest you take a moment to understand the process and how it will impact your cashflow.
- Any SME that makes card terminal sales can apply for a merchant cash advance. Commercial Finance Network makes this process incredibly easier and faster.
- The lenders take a look at the recent history of card based transactions and decide your affordability. This is similar to other forms of credit and loans.
- Once the lender determines your affordability, you’re presented with a cash advance offer.
- After you accept the quote, the money is transferred directly to your bank account. This process is smooth and involves minimal paperwork. Working with an experienced whole of market broker like Commercial Finance Networks means that you will have the added advantage of speed. You can expect to see the funds in your account in 1-2 business days.
- You will start paying the money back to the lender as soon as the repayment period kicks in. The repayments are usually based on your daily business (5-25% of your daily card sales, depending on the offer you’ve agreed to).
- There is no conventional interest rate or APR. You’ll essentially be selling a fixed percentage of your future sales to the lender until the advance is fully repaid along with the fees and charges. An upfront interest amount is calculated using the “factor rate”.
Merchant Cash Advance Factor Rate – What It Is & How It Is Calculated
Every MCA quote you will receive will specify a certain “factor rate”. This number essentially replaces the traditional interest rate and tells you everything you need to know about the cost of borrowing.
The factor rate is expressed as a single number that typically ranges between 1.1 and 1.5 (depending on the health of your business and your affordability). For example, if you’re borrowing £10,000 from a lender and the factor rate is 1.1, you will be required to repay £11,000 in total. It’s really as simple as that.
There are a few things to consider here.
The factor rate differs from the APR/interest rate on two counts. Firstly, it is a fixed number that tells you exactly how much you will need to pay. Secondly, it has nothing to do with the balance of the advance that’s unpaid. It doesn’t matter how quickly you pay the MCA off, you will still pay the amount determined by the factor rate.
Merchant Cash Advance Is Not Really A Loan
In the traditional sense of the word, a loan is the amount you borrow and pay back as a function of the interest rate and time. Therefore, it should be easy to see why it’s not a good idea to treat a merchant cash advance as a loan.
As we mentioned earlier, when you borrow money using an MCA, you essentially agree to sell a part of your future revenue to the lender. The lender assumes much less risk here, even though it’s an unsecured mode of credit. We would go so far as to argue that a business cash advance/merchant cash advance is an unsecured counterpart of revenue based alternative sources of funding for SMEs (for example, invoice finance).
How Much Can You Borrow?
Larger businesses usually don’t feel the need to borrow via MCA since they have at their disposal stronger lines of credit from banks and other lenders. SMEs, on the other hand, can borrow enough to tie up the loose ends, get the cashflow in order and access money to fund purchase orders/new business opportunities.
At Commercial Finance Network, we help UK SMEs borrow anywhere between £2,000 and £200,000 as a cash advance from our panel of responsible and specialist lenders.
Please note that the amount you can borrow will depend upon the following factors:
- The nature of your business and the industry/sector you operate in
- The average daily turnover (card terminal transactions)
- The overall profitability of your business
There’s no need to feel overwhelmed by these factors – these are essentially the same factors that lenders will look at while assessing any other loan application.
Please read on to learn more about how we, at Commercial Finance Network, make it easy for you to apply for and get a merchant cash advance from UK-wide lenders.
Merchant Cash Advance – A Short Case Study
Being a leading whole of market commercial finance broker, we get to work with businesses of all sizes. This gives us a unique vantage point regarding the requirements of UK SMEs. The following MCA case study will help our customers and readers understand the practical importance of merchant cash advance as a financing tool.
We recently worked with a London based mobile food startup. Their business model was interesting and had already received a good deal of positive PR in local circles. However, at less than 18 months of age, the business had no history of credit to fall back on, meaning that they couldn’t borrow the money required to grow their business from banks and high street lenders. To receive more funding from investors they already had on board, they had to hit a monthly sales target – a target they couldn’t possibly reach without investing in a new point of sale (a financing catch 22 situation). This meant that they needed at least £20,000 to buy a new van and hire 2 more employees.
After understanding their unique situation, we forwarded their application to a specialist MCA lender who agreed to assess their business.
The following terms were drawn:
- Cash advance: £20,000
- Factor rate: 1.20
- Total amount to be repaid: £24,000
- Average card sales forecast (per month): £9,000
- Average card sales forecast (per day): £300
- Percentage of daily card sales to be paid back: 33% (£100)
- MCA repaid in around: 240 days (8 months)
As the borrowing business received the money in just about a couple of days, they were able to invest it back readily. This opened up an additional revenue stream for them, and as they reached the targets laid down by the investors, they were also able to access a new line of credit.
Merchant Cash Advance – Who Is It Suited For?
Merchant cash advance is suited for SMEs that:
- Require money urgently
- Register significant card sales on a daily basis
- Operate in cash rich industries and sectors
Are You Eligible For A Merchant Loan (Merchant Cash Advance)?
You’re eligible for a merchant loan if:
- You’re a UK based business that accepts card payments,
- You have a merchant account,
- You generate at least £2,000 in card sales each month (over a minimum of three months),
- You are a registered business (sole trader, partnership or limited company)
Advantages Of Business Cash Advance (MCA)
Now that we’ve seen how MCA works, let’s now see what advantages it has to offer to the borrower.
1. It’s Fast
The most important advantage is the speed. When you work with an experienced broker and specialist lenders, you can expect the entire process to complete within a matter of hours. This not only saves you a great deal of hassle, it also lets you put the money towards the requirements as soon as possible.
2. It’s Flexible
Since there is no interest rate to worry about, you know how much you’re going to have to pay back. This makes merchant cash advance incredibly flexible. On a good day, you will pay more and on a slower day, you’ll pay that much less. In other words, you will never be put in a position where you have to stretch your finances thin just to make the repayment.
3. No Need To Draw From Your Cash Transactions
You will only pay back a part of your card sales. You will still have full control over all the cash sales you make during this period.
4. No Collateral/Security Required
MCA is an unsecured form of credit. You will not be required to raise a deposit or collateral to get approved.
5. Poor/No Credit Shouldn’t Be A Problem
Most lenders tend to approve merchant cash advance applications from SMEs that have poor/no history of credit as long as the business performance is promising.
6. MCA Works With All Major Card Terminals
All major card terminals and machines are compatible with the auto debit facility for card sales.
7. MCA Can Be Topped Up
Some lenders provide the option of topping up your existing MCA account based on your history of repayment and business performance. This allows you to borrow more as and when required.
Relative Shortcomings Of Business Cash Advance (MCA)
- Merchant cash advance is not at all suitable for businesses that do not accept card payments.
- Young businesses that have little to no history of card sales find it difficult to get approved.
- While MCA helps you gain access to funds faster, it also means that your daily cash flow will be impacted as long as the advance isn’t fully paid back.
How To Apply For A Merchant Cash Advance?
Merchant cash advance is a specialty form of financing. As is the case with all such finance products, it’s always a good idea to work with specialist lenders. Generic high street lenders don’t have the expertise or experience required to make such deals work, and the borrower has to face the brunt in the form of an unreasonably expensive offer.
At Commercial Finance Network, we help you get fast, flexible and low factor rate MCA offers from some of the most experienced and trusted specialist lenders across the UK.
Applying is easy – just fill in this form to message us or call us on 03303 112 646 to speak to a merchant cash advance specialist.
A Merchant Loan Can Be Used The Way You Want To
Unlike a mortgage or asset finance, merchant cash advance can be used to fund any and every business requirement as you see fit. Common examples include:
- Opening up a new location
- Managing the daily cashflow
- Staff salaries
- Funding new purchase orders
- Advertising and marketing
- Purchasing new equipment
- Paying off other loans
Make Merchant Cash Advance Work For Your Business
Given the number of positives it brings on board, merchant cash advance is undoubtedly one of the most versatile financing tools an SME can rely on.. To know more about how an MCA can help you grow your business and take care of emergency requirements, call us on 03303 112 646. You can also apply for a merchant cash advance directly by filling in this online form.