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.
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.
Merchant Cash Advance?
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 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
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.
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”.
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.
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
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
- The overall profitability of your
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.
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
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.
their unique situation, we forwarded their application to a specialist MCA
lender who agreed to assess their business.
The following terms
- Cash advance: £20,000
- Factor rate: 1.20
- Total amount to be repaid: £24,000
- Average card sales forecast (per month):
- 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.
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
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)
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
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
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
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
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
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
major card terminals and machines are compatible with the auto debit facility
for card sales.
7. MCA Can Be Topped Up
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.
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
- 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
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.