It is not uncommon for small business owners (and SMEs in general) to run into occasional cash flow issues. Where extra funds are needed to bridge a temporary financial gap, the first port of call for most SMEs is the High Street.
Unfortunately, the vast majority of conventional loans and funding solutions for business purposes are not particularly quick or easy to arrange. Those that are may offer the bare minimum flexibility while attaching potentially high rates of interest.
This is where a merchant cash advance can make an attractive and affordable alternative. Also known as a business cash advance, a merchant cash advance is a specialist cash flow solution for small to medium-sized businesses, enabling the applicant to borrow against future sales revenues.
The loan is secured against subsequent transactions, though it is technically issued as an unsecured loan. Almost any business that accepts card payments can apply for a merchant cash advance, which can be a flexible way to cover temporary financial gaps.
How Does a Merchant Cash Advance Work?
The logistics of merchant cash advance facilities are fairly straightforward.
In a typical example, a small business may process credit card transactions averaging £5,000 per month. In order to purchase the stock and materials needed to fill a large order, the company seeks a merchant cash advance of £5,000. The facility is issued by a specialist provider, and the money can be used for any legal purpose whatsoever.
When the loan is issued, the percentage fee (factor rate) payable on the loan is covered up front. For example, if a merchant cash advance of £5,000 is applied for, the actual balance the borrower gains access to may be £4,500 (depending on the percentage fee agreed).
This means that the percentage fee is fixed at the beginning of the loan term, and the borrower knows exactly how much they can expect to repay. This differs from a conventional loan or credit facility, where interest and overall borrowing costs increase over time.
The business subsequently uses this £4,500 to fulfill the client’s order. After this, the lender collects a monthly payment at a fixed rate based on credit card transactions taken by the company.
For example, if the agreed rate is 20%, the lender would collect £1,000 from £5,000 in credit card transactions. If the business experiences a slow month and only processes £2,000 in credit card transactions, the lender will collect £400.
This continues until the outstanding balance is repaid and the borrower is able to access the rest of their line of credit in the meantime.
What is the Benefit of a Merchant Cash Advance?
Simplicity and flexibility are two of the main advantages of a merchant cash advance. They can be comparatively quick and easy to arrange while at the same time attaching a lower cost than most similar products (like business overdrafts).
But what is particularly attractive about a merchant cash advance is the way repayments are tied to revenues. If a business has a particularly profitable month, the lender collects more money. But where a slow month (or even several consecutive months) occurs, the lender collects significantly less.
This makes merchant cash advances ideal for small businesses, where it is often difficult to predict financial performance from one month to the next. A merchant cash advance responds to the needs and the performance of a business, making it a lower-risk facility than most comparable loans and commercial funding solutions.
Who Can Qualify for a Merchant Cash Advance?
All lenders impose the same basic qualification criteria where merchant cash advance products are offered. For the most part, you will simply need to process credit and debit card payments on a regular basis, totaling a minimum of £2,000 to £3,000 per month.
The amount you can borrow will be determined by the combined value of your monthly card transactions and your general financial performance at the time of your application.
It may even be possible to qualify with poor credit if the rest of your application meets the lender’s main eligibility requirements.
