A guide to merchant cash advances for businesses

A merchant cash advance, otherwise known as a business cash advance, is a type of lending that is based on your business’s future revenue. You could use a cash advance to boost your cash flow, fund your operations or drive growth.

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A guide to merchant cash advances for businesses

What is a merchant cash advance?

A cash advance is a type of lending based on your business’s future revenue. 

It’s different to a conventional business loan: instead of having an outstanding loan amount, interest rate, and term, a cash advance sells future sales to the lender at a discount. The term ‘advance rate’ is used instead of ‘loan amount’.

Cash advances are designed for companies and organisations that take card payments from customers. The business borrows a sum of money which it repays through a percentage of its customer card payments. 

Cash advances are best suited to small businesses looking for a cash injection within 24 hours. Lenders may require you to have been trading for a minimum of six months and have a card transaction turnover of at least £10,000 per month.

That said, many lenders will accept businesses that have been trading for just a month, with a significantly lower monthly card transaction value. This is why it’s helpful to use a lending marketplace to find the best deal on the market.

The first and most basic requirement is that you are a sole trader, partnership, or limited company registered in the United Kingdom. The second fundamental requirement is that you regularly process card transactions from your customers — either online through a merchant gateway provider or on a card machine. 

Cash advances are popular in hospitality, cafes, garages, and retail shops, and are also commonly used by e-commerce traders that accept card payments online.

How does a merchant cash advance work?

With a standard business loan, you get a principal lump sum at the start of the term and then pay interest for as long as that amount is owed. This concept applies to loans, overdrafts, revolving credit facilities, and lots of other types of finance. 

In fact, most of the common forms of finance work on this principle.

The total cost of the finance – i.e. the interest you pay on top of the principal lump sum – varies depending on how long you take to pay back the loan. 

Cash advances turn this idea on its head. Instead of having interest constantly ‘running’, the total cost of finance is agreed upon up-front. So instead of a monthly interest calculation, there’s a fixed finished line you need to get to. 

Here’s how it works in detail:

Merchant cash advance example

  • Cash advance amount: £10,000

  • Amount repayable: £12,500

  • Monthly repayment percentage: 20%

In this example, the lender offers to buy £12,500 worth of future sales for £10,000, at a repayment percentage of 20%. £10,000 is what the business receives, and £12,500 is what it will eventually pay back. 

With a business cash advance, repayments are taken from your revenue. The 20% figure doesn’t refer to interest, but rather the proportion of your revenue that will go towards paying back £12,500. 

Let’s see how this breaks down per transaction:

  • Customer 1 pays £10; you keep 80% (£8) and the lender gets 20% (£2)

  • Customer 2 pays £129.99; you keep 80% (£103.99) and the lender gets 20% (£26)

  • Customer 3 pays £450.96; you keep 80% (£360.77) and the lender gets 20% (£90.19)

After these three transactions, you’ll have made repayments of £118.19 (2+26+90.19). 

Of course, you’ll have more than three transactions in an average day – this is just a simple way to demonstrate how it works. The key point is that each of these transactions chips away at the £12,500 repayment amount – the finish line.

The crucial thing to understand about this method of repayment is that because it’s proportional, you pay back more when your revenue is higher and less when things are slow. But however it turns out, the total cost of finance doesn’t change – you’ll always be paying £12,500, and there’s no compounding interest.

This repayment method means that cash advances are more flexible than business loans. Instead of a fixed monthly repayment that has to be met regardless of your sales, the amount you repay goes up and down each month in line with trade.

What can I use a merchant cash advance for?

Like most short-term business loans, you are entitled to use the funds how you please – as long as it is solely for use in the business and not for personal expenses. Here some examples of expenses you might use your cash advance for:

  • Unexpected repairs or renovations

  • Stock

  • Working capital

  • Emergency expenses

  • Equipment upgrade

  • Website development

  • Technology upgrade

  • Machinery 

Business borrowers don’t have to navigate fixed monthly payments as they would with a traditional business loan. Every time a customer uses the card machine, a percentage is automatically transferred to the lender. The more money the business earns through card payments, the quicker it pays off the cash advance. 

Of course, it works the other way around too.  

How much can I borrow through a merchant cash advance?

Merchant cash advances usually range from £30k to £300k. You might be able to get more if your business has significant monthly revenue. In some cases, dependent on the lender’s risk assessment, the cash advance could be up to 150% of your monthly card sales.

What are the benefits of a merchant cash advance?

  • Flexibility – Your business only pays back the finance when it takes customer card payments, and repayments correspond with your sales.

  • Speed – Depending on the lender and application process, you can get approved for a merchant cash advance within just 24 hours. 

  • Unsecured – Merchant cash advances are a type of unsecured business finance, meaning you don’t need to secure it with business assets. 

  • Application ease – When applying for a conventional loan, traditional lenders may require a business plan – merchant cash advance lenders don’t.

  • Risk – As the repayments are automatically taken from the money you receive from card payments, there can be less risk of ‘defaulting’ on your loan.

  • Transparency – The total amount you pay back doesn’t change; the lender will tell you what the total cost is when you take out the cash advance. 

Are you ready to apply for a merchant cash advance?

When it comes to your merchant cash advance, the lender will take your average monthly turnover into consideration to work out how much you’ll be able to repay comfortably. You’ll need to be a UK business with a card machine that has been trading for a minimum of six months (although some lenders will consider less). 

Each provider offers something different. Repayment lengths can vary, as can interest rates and T&Cs. 

Funding Options can help you search the business finance market to find an option that aligns with your needs and circumstances. It takes minutes to apply, our platform is easy-to-use, and it doesn’t affect your credit score. To get started, tell us how much you need to borrow, what it's for and provide some basic information about your business.

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Stuart Lawson

Chief Commercial Officer

Stuart is Chief Commercial Officer at Funding Options where he plays a key role in driving the growth of the business and its relationships with more than 120 partners. A finance industry veteran, he has a strong background in alternative finance, corporate and commercial banking, as well as global transaction banking.

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