What is a merchant cash advance?

Merchant cash advances are an ideal funding solution for businesses that use card terminals to process sales, particularly if they don’t have or don’t want to offer other assets as security against borrowing.

If your business processes sales of at least £6k per month using card terminals and the sales are made up of multiple, smaller transactions, a merchant cash advance could be a great solution for you.

How does a merchant cash advance work?

When you begin a merchant cash advance facility, the lender will advance you the amount of money agreed in one lump sum. They then collect payments on a weekly or monthly basis as a percentage of the volume of transactions submitted via your card terminals. In this way, the repayments vary according to your transaction volume.

The lender works with the terminal provider to monitor your card transactions. This both allows the lender to base what you can borrow off the volume you are transacting, as well as enabling them to calculate repayments.

Because of the way a merchant cash advance works, unlike a traditional loan there is no fixed monthly repayment, interest rate or pay-off date on a merchant cash advance.

Repayments of the loan are usually a percentage of your business’ revenue collected via the card terminals, and the payments therefore vary in line with the business’ income. Ideal for seasonal businesses, during busy periods you will pay more back, and during quieter periods you will pay a smaller amount.

If the business enters financial difficulty and is unable to repay the merchant cash advance, as no security is required your business’ assets are not usually at risk. As repayments are calculated automatically based on the volume of card transactions, there is no potential for late charges being applied.

 

What are the advantages of a merchant cash advance?

Unlike fixed payment finance, repayments on a merchant cash advance vary with your sales volume. This offers some reassurance that you will be able to afford the monthly payments even if you have a month where business is slow.

The merchant cash advance lender receives their repayments directly from the card terminal provider, meaning that the cost of the repayment is taken at source. Your business never needs to make a direct repayment to the lender. Repayments are then taken automatically until the total amount is paid off.

 

Will my other business borrowing be affected?

As merchant cash advances aren’t traditional lines of finance, and aren’t secured on business assets you may be able to get other types of finance.

For example, if you already have business asset financed via a lease agreement, you may be able to get a merchant cash advance to boost your cash flow at the same time.

 

Are there any disadvantages to merchant cash advances?

The implicit interest rate on a merchant cash advance can appear more expensive than traditional lines of finance. This compensates the lender for the increased risk in that the finance is not secured on business assets.

As a cash advance is not technically a loan and is based on anticipated future income, advances rarely last for more than a year. However if your repayments are made without issue, there is often the ability to refinance in order to extend the life of the facility.

 

How much can I borrow?

The total amount you can borrow on a merchant cash advance varies along with your card transaction volumes. A good estimate is that you will be able to borrow the same amount as your monthly business turnover.

If your business invoices customers rather than taking card payments, a merchant cash advance is not likely to be the solution for you, however there are other finance options. Contact us to discuss what might be available for your business.

 

Merchant cash advances are a specialist area and the number of lenders that offer this source of finance is limited. Halo Corporate Finance are experts in this type of alternative funding and have a number of funders on our panel that we can work with to secure the best finance solution for your business.

If your cash flow is strong and your business operates in a sector that is traditionally challenging to obtain finance for, such as leisure or retail, a merchant cash advance could be an excellent way to secure some cash flow finance quickly.

Contact one of Halo’s expert team today on 0345 450 1966 or email us on sales@hcfl.co.uk.

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