6 March 2020
An advance payment made to a business from the provider as a lump sum, which is repaid as an agreed percentage of the merchant's future credit and debit card transactions.
It sounds simple enough, but in comparison to other 'traditional' funding products on the market, it's leaving businesses confused.
Here are 4 myths and misconceptions about the Merchant Cash Advance that may clear up confusion:
A Merchant Cash Advance is not a loan. As the name eludes to, it is an advance payment against the future income of your business. Once you've received said lump sum from your Cash Advance provider, it is repaid automatically via your card machine or ecommerce gateway. Whereby an agreed percentage of takings from card transactions is used to repay the advance. As soon as the funds are received, repayment begins.
It's this flexible means of repayment that makes a Cash Advance so attractive. As a business owner, you still receive the lion's share of every card transaction, whilst your lump sum can be used as a cash injection into your business: buying new stock, funding a refurbishment or recruiting new team members.
Another difference compared to a traditional loan, is that a Cash Advance is contractually unsecured. With a loan, you need collateral to secure it, which acts as the bank's insurance policy if you can't keep up with repayments. This makes the Cash Advance model perfect for businesses with little personal or business assets, but a good volume of card transactions.
A healthy personal and business credit score is obligatory for most business loans but Cash Advance providers tend to be more lenient.
Approval is based on the consistency of your card sales, the length of time you've been in business and any other debt you may have. This makes Cash Advance a good alternative for businesses refused funding elsewhere.
Myth 2. "Anyone can get one."
In order to pre-qualify for a Cash Advance, it will not suffice to be simply ‘accepting card payments’ from your customers; although this is naturally the first, compulsory step to the application process.
Most lenders will stipulate a minimum monthly card turnover threshold you must meet in order to qualify, anywhere in the region of £1,500-£5,000 a month (Retail Merchant Services stipulate a threshold of £2,500 per month). This amount can vary depending on your industry.
As stated this is an average value, which again may differ between providers, but is usually calculated across a 6-12 month basis. So if you are new to cards, it may be a case of waiting to build up this baseline before applying for a Cash Advance.
You may be asked by the provider to supply a record of merchant statements to support your application. If you don't have access to these, simply request them from your merchant services provider.
These are the first steps to pre-qualification, along with proving how long you've been in business, some proof of ID and other KYC (Know Your Customer) documents. You may still need to provide business tax returns, bank account statements and some other documentation before being approved.
This may sound like a lot of work, but most providers allow you to complete the application online and can normally return an approval decision to you within hours and funds sent to you in days. This could be a life line to your business if your cash flow gets affected by an unforeseen cost and is one of the fastest routes to funding.
The key to estimating the size of your advance is knowing your monthly card payment turnover. This will at least give you a rough estimate to the size of advance you could obtain.
Typically you will receive an advance at 100-110% of your credit and debit card monthly turnover e.g. a monthly card turnover of £6,000 will equal around a £6,000 advance. However, this is not set in stone. In some instances, you can receive 50% or up to 250% of your card transactions.
There's also a bracket that Merchant Cash Advance providers set advance sizes to. With the minimum advance matching their qualification threshold (£1,500-£5,000) and the upper limit around £250,000-£300,000.
However, if you find that you're touching the ceiling of this range, a provider will always be happy to explore a bespoke arrangement for you. This can be an attractive alternative to funding from the bank; offering you more money and in spite of a potential lack of assets or good credit.
This may be true for other small business loans, where a fixed rate payment and fixed interest means you pay off the same amount each month. Although this can be easier to account for each month, you could see cash flow dry up if you have a quiet trading period or any sudden expenses. Not to mention being bound time-wise by a strict repayment schedule.
What makes an Cash Advance for small business so flexible, is repayments are based on a flat percentage of all your card transactions. The contract may stipulate that 10% (for example) of all card transactions are used to repay the advance. Although that percentage remains the same, the repayment amount will flex to the card transaction values, meaning you will never have a disproportionate repayment compared to your income and there's no compounding interest. Effectively, you will only repay as you earn.
Every Cash Advance is subject to a factor rate of anywhere between 1.1-1.5, which when multiplied by your advance amount will be your total repayment to the lender. A cash advance typically takes about 9 months to repay.