Merchant Cash Advances

A merchant cash advance is essentially a loan/cash advance secured against the future revenue from your card terminal. Your companies card terminal is the name of the machine that you use to take card payments with. The advance is then paid off by future sales on the machine, as a proportion of your revenue.

It is really popular with the retail, leisure and hospitality sectors as it tends to be fast, flexible and available for companies that don’t have large amounts of assets – but do take lots of constant card payments.

How does Merchant Cash Advances work?

If your business takes card payments through any sort of device, then they will go through a Card Terminal Provider. The Card Terminal Provider is the company that will process all of your card transactions.  In the case of a Merchant Cash Advance, the lender works with the Card Terminal Provider so they can have full visibility over your company’s finances and see how much money is coming into your business through card transactions.

As the lender can see very quickly the amount of money your turnover every month on average, they will be able to really quickly work out how much money they can lend you and at what rate. Once leant, the lender retrieves their money through your card terminal provider at the percentage rate you agreed. This means you don’t have to do anything different or physically make any repayments.

Pros

There are lots of advantages to Merchant Cash Advances. To start with they are:

•       Fast. As there is no need for a background or long credit checks these types of loans are quick and you could get your money within hours.
•       They are accessible to all businesses that have a merchant terminal.
•       Scalable rates – As repayments are based off a percentage of income rather than the interest rate, if you are having a lean month then your repayments are less. If you are having a great month then your repayments are more. Unlike traditional fixed payment loans, you can’t be caught short on repayment if you have a quiet month.
•       Automatic payments – Payments come from the card terminal provider. Meaning that as a company you don’t have to do anything, you just receive less income from your card terminals. This especially works well if you are taking cash as well, as you get that in full. It is only payments on a card that need to be paid back at a percentage of monthly revenue. Once the loan is paid back, you will receive your full income again.  
•       A good key – Again, like other forms of working capital finance, Merchant Cash Advances are another great key to unlocking capital. It works really well with other forms of working capital finance, such as invoice financing or equipment leasing, to really help release the cash a business needs to continue or grow.

A working example:

You own a restaurant and your main fridge has stopped working. It is Thursday night and you have a booked-out restaurant for the next 3 nights and you haven’t got the cash to buy a new one.

To buy a fridge on Asset finance is going to take to long, as you need it now. You can take out a Merchant Cash Advance based on your average monthly takings. You can then use this cash to buy a fridge ASAP. You can then refinance the fridge on Monday morning on asset finance, releasing more cash into the business. You can then use this cash as a cushion to wait for the Merchant Cash Advance to pay itself back.

Cons

•       Lending is based on your average turnover, meaning you are limited to the amount you can borrow.
•       If you receive more money in Cash or BACS transfers, then it may be hard to secure a Merchant Cash Advance. It also might not be the right product for you, so get in touch to see if we can help.
•       Lenders sometimes only work with specific card terminals, which can reduce the number of lenders you can work with.
•       It isn’t cheap. Like any sort of fast finance, it isn’t necessarily the cheapest way to fund your strategy or problems. However, it is quick.