Cash Advance could be one of the fastest and most flexible forms of small business finance available on the market. However, the speed of approval, the lure of a lump sum and the prospect of improved cash flow could be screening the facts behind the product, how it works and what it takes to pass the application process.
Our Definition of Cash Advance
A financially unsecured 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 Cash Advance that may clear up confusion:
Myth 1. "It's like a traditional loan."
A Cash Advance is not a loan. As the name eludes to, it is an advance payment that's proportionate to 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. 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 to your business: buying new stock, refurbishments or recruiting new team members. Also, your physical cash intake remains unaffected.
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 or newer businesses yet to build a solid credit history.
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 (RMS stipulate a threshold of £2,500 per month). This amount can vary depending on your industry.
This is an average value, which again may differ between providers, but is usually calculated across a 4-12 month basis (RMS require a minimum of 4 months' data). 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. You may still need to provide business tax returns, bank account statements and some other documentation before being approved.
This may sound like a fair amount of work on your part, 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 lifeline to your business if your cash flow gets affected by an unforeseen cost and is one of the fastest routes to funding.
Myth 3. "You can get an advance of any size."
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 value bracket that Cash Advance providers set advance sizes against. 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.
Myth 4. "There are fixed repayments."
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 a Cash Advance 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 amounts, meaning you will never have a disproportionate repayment compared to your income. You only repay as you earn.
Note: 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.
Flexible, proportionate repayments
Note: Eligibility criteria will apply for a Cash Advance from RMS. The business must be trading for 4 months or more, with a minimum of £2,500 in card transactions per month. All Cash Advance and Loan Advance applications are processed by our dedicated provider, YouLend.