What is a merchant cash advance?

What is a merchant cash advance? As the name suggests, a merchant cash advance is a type of short-term financing that allows businesses to access all or part of their future credit card sales as immediate funds. It’s an alternative to more traditional business loans and overdraft facilities and is particularly useful for those who find themselves cash poor but with a healthy turnover.

If running a small business has taught you anything, it’s that having enough money coming in at the right time can make or break your success – whether it’s to purchase stock for your shop floor or cover staff wages. But what happens when there isn’t enough cash?

The concept of a merchant cash advance is simple. With most transactions now processed via credit card instead of good old fashioned cash, many businesses have a stream of credit card transactions every month. Financial institutions are keen to take advantage of this, offering and look for merchant cash advance as an alternative way to access working capital short term by using the future value of these transactions as collateral.

Merchant cash advance providers will typically advance up to 90% of your available credit card sales for between 6 and 24 months (although they can be opened for longer if required). The average advance is £75,000 (A$130,000), with interest rates starting at around 4%.

As you continue to process credit cards through your business’s existing payment processing gateway during the agreed loan period, monthly repayments are calculated based on expected monthly turnover, which you provide upfront. These repayments are then transferred to your business bank account on a pre-agreed payment schedule. At the end of the loan period, you repay the balance plus interest or sell it to another cash advance provider for 90% of its value (known as ‘rolling’).

Businesses that need capital quickly will find that this type of fast finance is beneficial. Loans can be approved more quickly than with traditional lenders and without requiring personal guarantees or security against other assets like property (for good or bad). There’s also less red tape involved – although some providers require credit assessments before finalising an agreement, these are usually performed by third parties rather than internally. However, some businesses may not be able to utilise 100% of their available credit card turnover.

If your cash flow is good and these loans are not the only source of finance, merchant advance providers will often offer better rates than traditional lenders due to their quick approval process and lower risk profile. Your business may not even need to list security against assets. However, suppose you have bad credit or require more money than what’s offered by a single provider (e.g. £75,000 (A$130,000) at once). In that case, multiple advances might be required, increasing application costs and interest repayments overall.

With most businesses continually trying to get every penny out of their operations to make ends meet, it’s no wonder that many are looking for alternative ways to finance themselves (and sometimes even take home a little extra in the process). This is especially evident in the high-risk, high-reward world of startups and SMEs.