There is a huge range of reasons for businesses to seek out finance. Expansion opportunities must be seized, key equipment must be fixed, employees must be paid, and so many more. However, a common throughline behind businesses seeking finance is urgency. Windows of opportunity can close quickly, while employees cannot be left waiting. Therefore, time is of the essence.

With this in mind, it’s important to consider your options carefully. There are just as many finance options as there are reasons to seek them, but not every option will be suitable for your situation. In this article, we’ll be breaking down merchant cash advances; what they are, how they work, and whether they can work for you.

What is a merchant cash advance?

A merchant cash advance is a type of finance that places a heavy emphasis on speed. In taking a merchant cash advance, you will be trading a percentage of your future sales, plus a fee of course, for an immediate injection of capital. Because of this, a merchant cash advance is more akin to a business transaction, rather than a loan.

As merchant cash advances centre around quick access to capital, they tend to be short-term finance options. This means that you can expect to repay your lender quickly. In this case, the borrower will usually pay a portion of their weekly, or sometimes even daily, sales to the lender, until the overall value of the loan plus interest is paid. While this means you’ll have to begin repayment soon after you receive your lump sum, it also means that if your sales dip, your repayments will decrease too.

How do merchant cash advances work?

Merchant cash advances occupy a somewhat unique niche in finance, one that traditional lenders don’t typically cater to. You aren’t likely to find a bank that offers merchant cash advances, so you’ll have to seek out companies offering this service. There are plenty of third-party entities that either offer merchant cash advances themselves, or are willing to help you find someone that does.

Once you’ve settled on a lender, you’ll need to submit an application. Thankfully, it’s a quick one, as a merchant cash advance is more concerned with your business’ revenue, rather than your credit history, when considering you for approval. This doesn’t mean your credit history is irrelevant, however, as we’ll soon discuss.

Should your application be successful, you will receive your money promptly, usually around 3-4 days after the initial acceptance. Repayment will typically begin once you receive the lump sum, with your costs being dependent on two aspects – the total value of the merchant cash advance and your factor rate. The total value is, of course, the overall amount you requested, while the factor rate is a variable that will differ from lender to lender. This is where your credit history comes in.

Factor Rate

Essentially, the factor rate is a measure of risk, with a lower rate reflecting a lower risk. The lender will assess several factors, such as your credit history and your business’ finances, then will affix a factor rate. Your factor rate will influence the total amount you must repay, with the typical range being between 1.1 and 1.5. For example, if you were to take out a £20,000 merchant cash advance with a 1.2 factor rate, your total amount due would be £24,000.

Repayment is simple, generally requiring little to no input on your behalf. The lender will collect a percentage of your sales, usually 10%, each day or week. This is often referred to as the holdback rate. Depending on the lender, the holdback rate may be taken directly from your bank account. Though there are other, less common, methods of collection. As it is a percentage, rather than a flat rate, you can be assured that your payments will only go as fast as your income. If it slows, you won’t have to fear paying more than you can afford. This makes merchant cash advance repayments vary dramatically in length, as some businesses will be able to repay their loan much quicker than others.

Advantages of merchant cash advances

Merchant cash advances, like any other form of finance, have their advantages, which we will summarise now.

A quick form of finance

Merchant cash advances are one of the fastest methods of sourcing capital. After a short application, you can expect to see your cash within as little as a day or two. Compared to the turnaround of many other forms of finance, this speed is a significant advantage.

Versatile

Merchant cash advances can be used for a range of purposes. In fact, they can fund pretty much anything you can think of, from stock to salary, and everything in between.

Revenue-based repayment

For most other forms of finance, loan repayment can get difficult if your revenue stream slows down. As merchant cash advances take a percentage of your revenue, the pressure of repayment is somewhat alleviated. If your sales decrease, your repayments will too.

Disadvantages of merchant cash advantages

Merchant cash advances do have their issues, however, as we will summarise in the below disadvantages.

Comparatively high cost

While quick and convenient, you pay a price for this luxury, and a high one at that. Compared to other forms of finance, merchant cash advances have some of the highest rates in the industry. Especially if you must pay a high factor rate. This can mean you’ll be making repayments for a while, especially if you have a small revenue stream.

Regular repayments

Although repayments centre around your revenue, their frequency can make things tough. This is especially true for daily repayments, which can seriously constrict an already tight cash flow.

Regulatory issues

There are two core issues with contracts and regulations surrounding merchant cash advances. First, as they depend on your revenue, there are no fixed terms of repayment. This can make it easy to overlook the risks, instead, fixating on the quickly available cash. Second, as merchant cash advances are closer to a business transaction than a loan, they are not regulated as loans are. This can make it easier to suffer from underhanded lenders when compared to other types of loans.

Are merchant cash advances right for you?

How suitable merchant cash advances are for you fully depends on your situation. For businesses needing a quick cash injection to seize upon an opportunity, few options can come close to the speed of merchant cash advances. However, if cash flow is tight to begin with, the added pressure of a cash advance could present a strain that is difficult to manage. However, provided you do your research beforehand, and carefully curate your potential lenders, merchant cash advances can be greatly beneficial to your business.