Is your business in need of a cash injection but cannot wait for lenders to make a decision on credit scores, collateral and assets? This is where merchant cash advances can help.
What is a Merchant Cash Advance?
A merchant cash advance (MCA) is a quick and easy way for SMEs to get hold of the cash they need, without having to commit to crippling, monthly repayments. Using debit/credit card transaction records as a guide, a business can obtain a cash advance from a lender with guaranteed proportionate repayments from these expected card payments.
We’ve put together an all-you-need-to-know guide to merchant cash advances and how they work. Keep reading to discover how your business can use your card terminal to unlock unsecured lending in a matter of days.
Quick Takeaways
Don’t have time to read on, here are our top takeaways.
How do Merchant Cash Advances Work?
Merchant cash advances are a type of short-term business financing. Instead of a traditional loan, you receive a lump sum upfront based on your daily credit card sales. This is repaid daily, typically as a percentage of your sales.
When are Merchant Cash Advance Loans Useful?
They are a great source of quick capital for businesses that need:
- Urgent Repairs
- Property Improvements
- Inventory Purchases
- New Equipment
- Working Capital
What is the Cost?
While merchant cash advances often have higher interest rates, they offer:
- Speed: Funds within days
- Flexibility: Repayments based on sales
- Accessibility: For businesses with less-than-perfect credit
To manage costs:
- Plan carefully
- Increase sales
- Consider alternatives
- Negotiate terms
Do You Need a High Credit Score?
Not typically, this makes them accessible to businesses with less-than-perfect credit. However, they can still affect your credit if not repaid on time.
So, How Does a Merchant Cash Advance Work?
As long as your business uses a card terminal to take customer payments, a merchant cash advance could be a viable option for you. This alternative business finance model allows you to access future income from card payments, paying the amount owed through an agreement percentage of customer card payments.
Unlike a traditional loan, there is no fixed repayment each month; your payments are all proportionate. So if your business is experiencing difficulties in cash flow, your MCA repayments will not add to your concerns. For example, on slower months, your repayments will be a smaller percentage of your income.
Benefit from Flexibility
Merchant cash advances allow this flexibility as these lenders work directly with the card terminal provider, this relationship enables them to have visibility of how much money is coming in and out of your business. This access provides them with the assurance they need to comfortably provide you with the cash advance.
The money that is released can be used for any purpose within the company, whether this is to purchase new stock, improve facilities or aid working capital.
How Much Can My Business Borrow?
With our merchant cash advances, you can borrow up to £1 million; however, this will vary from business to business.
The size of the loan you receive will depend on two particular factors: the business’s average turnover and the average size of transactions.
There is no need for a formal credit check with MCAs. Instead, a lender will simply assess your company’s average turnover in an effort to evaluate your ability to manage the repayments. If the lender is confident that the income is there to repay the loan, they will be comfortable entering into a flexible agreement.
The Application Process
The good news is that the application process for a merchant cash advance is a lot more straightforward than what you would be required to do to get a business loan from a bank.
A merchant funding provider will still request some information about your business finances, including:
- Your total income
- Information on the monthly credit card transactions you usually process
- Your financial projections for the business
- Your company structure
- Your company’s financial history
Although it’s not usually a deciding factor, in some cases, your credit score may be reviewed as well.
Debunking the Myths
Myth 1: I Must Have Security or a Guarantor
It all depends on the lender. Some lenders will prefer you to provide a guarantor for their own security. Your guarantor will be responsible for paying the outstanding balance should you defer on the repayments. On the other hand, alternative security may be required. In these instances, another asset may need to be offered if you fail to meet the terms of the agreement.
Myth 2: I Need a Good Credit Score
No, a good credit score is not required to enter into a merchant cash advance. Eligibility is instead assessed on average turnover and expected debit/credit card transactions. This loan centres around cash flow; therefore, MCAs are ideal for businesses with low credit scores and minimal assets, as well as companies without a formal business plan or strategy.
Myth 3: Being Eligible is Difficult
If your business meets the minimum criteria, they are eligible for a merchant cash advance. All lenders ask is that they reach at least £10,000 per month as a minimum number of debit/credit card sales, have sufficient profitability to evidence that the loan will be repaid and have records of bank statements and audited accounts. There is no requirement to be a homeowner and, to reiterate, a good credit score is also not necessary.
Who Can Apply for a Merchant Cash Advance Loan?
Any business that takes monthly debit/credit card payments can be eligible for a merchant cash advance. These companies must be able to provide evidence of steady card transactions and detailed, audited bank records. This means sole traders, partnerships and limited companies can also be eligible for an MCA.
In addition to that, to be approved for a merchant cash advance, you should ensure you work with an approved credit card processor. This helps build your credibility and gives the lender a sense of security when dealing with your company.
Is It the Right Choice for You?
Choosing the right funding method depends on your business’s specific needs, creditworthiness, and financial goals. It’s often a good idea to explore multiple options and compare terms before making a decision. Other borrowing products include more traditional business loads or potentially crowdfunding to raise the needed amounts.
Merchant cash advances offer a quick and flexible funding solution for businesses, especially those with less-than-perfect credit. By understanding the benefits and potential drawbacks, businesses can make informed decisions about whether MCAs are the right financing option for their needs.
Merchant Cash Advances: The Advantages and Disadvantages
If you’re on the fence whether or not merchant cash advances are the right option for your business? Check out the main advantages and disadvantages below.
The Pros
- High Approval Rates – merchant cash advances allow for all businesses, regardless of their credit score, to access affordable and flexible alternative funding.
- No Interest Rates, APR or Fixed Payments – there are no additional, hidden or penalty payments. MCAs simply consist of flexible payments based on future sales from credit and debit card sales.
- Automatic Payments that Compliment Your Cash Flow – We only get paid by you, once you have been paid. Any fluctuations within your cash flow will be reflected in your flexible repayment agreement. As these payments are automatically taken, you won’t have to worry about arranging the transfer or late fees.
- Short-Term Repayment Period – the majority of merchant cash advances are repaid between 5 to 10 months.
The Cons
- Require Card Payments – if your company does not have a business card machine or takes credit/debit card customer or client payments, this funding option is not available to you. For a merchant cash advance to be agreed upon, the repayments must be taken proportionally from a card terminal.
- Capped by Cash Flow – as your eligibility is assessed on cash flow, so is your borrowing limit. You will only be allowed to borrow a figure that is in line with your monthly card transactions.
- Short-Term Solution – MCAs are a great way to unlock additional funding when it is needed. With a short application process and quick decisions, it is easy for the majority of businesses to get their hands on the money. However, if your business is experiencing more serious financial difficulty, an MCA may not be enough to guarantee long-term security.
Merchant Cash Advance vs Loans
Merchant cash advances are designed to be an alternative finance option for businesses. Despite offering businesses a cash loan with a lender, they have a key difference from traditional loans.
MCAs allow companies to secure lending against their card terminal, with a flexible repayment strategy. Unlike bank loans, for example, there are no fixed payments. Merchant cash advances agree for companies to pay back a small percentage of debit/credit card transactions. These payments are proportional to your monthly takings; if you experience a lull one month and experience cash flow issues, your MCA repayments will reduce accordingly.
Another considerable difference is the application process. Loans have a lengthy approval process, with many banks taking months. MCAs, however, can approve and provide the much-needed cash injection within days. This finance method has a more lenient approval process and does not require access to your credit history or details of your assets; therefore, decisions can be made based on fewer questions.
We Can Help You Today
With AptPay, our application process is simple. If you think your business will benefit from a merchant cash advance call us on 0121 720 4020 to start your application process or email us at info@aptpayment.co.uk for more information.
Once you get in touch, following a couple of easy questions our team will be able to assess your suitability for a merchant cash advance. Our friendly experts will be able to give you a definite answer within a matter of days.
What happens if you default on your merchant cash advance?
With any borrowing, if a borrower fails to meet their repayments, a lender has the right to pursue other avenues to retrieve their money. If you have already provided your lender with a guarantor, they will be expected to meet the outstanding total. Similarly, if other assets have been documented, these will be taken to match the value needed to clear the debt. In instances where a guarantor or security has not been agreed, the lender will expect assets to be provided.
For the borrower, defaulting on a merchant cash advance can result in legal action, negatively affecting their credit score and, in some cases, causing bankruptcy.
How to get out of a merchant cash advance?
It is worth remembering, there is no set timeframe for an MCA. If you wish to leave, you must pay off the remaining balance and leaving fee. It’s as simple as that.