Member Article

How Does a Merchant Cash Advance Work?

UK SMEs routinely find themselves grappling with cash flow issues. Of the approximate 5.5 million active SMEs spanning the country, a full two-thirds have experienced some form of cash flow problem, according to a recent report by the Federation of Small Businesses suggests.

Increasingly, SMEs are turning to alternative finance solutions such as merchant cash advances (MCAs) to inject liquidity into their operations. But what exactly is an MCA and how can it help a typical small business manage its cash flow better on a day-to-day basis?

What Is a Merchant Cash Advance? A merchant cash advance is a specialist funding solution designed for small to medium-sized businesses which process comparatively high transaction volumes through credit or debit card sales. Unlike traditional loans, an MCA provides an advance on future card sales, offering a fast and convenient injection of funds upfront.

Essentially, the firm’s projected future card takings are used as a form of non-binding security for the loan, enabling them to tap into revenues they have not yet collected.

How Do Cash Advances Work? A merchant cash advance operates on a principle of projected future sales. The provider offers an upfront sum, calculated based on the business’s average card sales.

The business then repays this amount by deducting a specified percentage from their daily or monthly card transactions until the full amount, plus fees, is repaid.

What Are the Benefits of a Merchant Cash Advance? MCA’s flexible repayment structure, determined by daily card sales, provides businesses with an advantage during slower periods. Repayments are tied directly to card transactions, meaning that more is repaid when business is good, while less (or perhaps even nothing) is repaid during quieter times.

It is also a fairly simple facility that offers quick access to funds, often within a matter of days. Furthermore, no collateral is required, easing the application process for SMEs (which may not have assets of value to provide as security) and reducing risks for business owners compared to conventional loans.

What Are the Drawbacks of a Merchant Cash Advance? Despite their broad-ranging benefits, MCAs come with downsides that must be carefully considered. Primarily, they can be more expensive than traditional bank loans when utilised long-term, with higher-than-average interest rates.

Furthermore, failing to accurately forecast card sales can lead to longer than expected repayment times, resulting in elevated costs. It is also only possible to take out a merchant cash advance if your business processes sufficient card transactions on a monthly basis.

What Are the Fees and Interest Rates for Merchant Cash Advances? In 2023, a typical MCA attaches a factor rate between 1.1 and 1.5, translating to an APR of approximately 20% to 50%. This cost structure makes MCAs a highly cost-effective option when the balance is repaid promptly, though not a viable longer-term solution.

Who Is Eligible for A Cash Advance? MCAs are typically accessible for businesses that have a consistent amount of card transactions. This includes retailers, restaurants and other consumer-facing businesses. To qualify, businesses must be able to demonstrate a steady volume of card sales – typically in the region of £5000 to £10,000 per month.

How To Apply for A Merchant Cash Advance? Applying for an MCA involves an assessment of your credit card receipts to determine your eligibility and the maximum amount you can borrow. However, MCA terms and conditions can vary significantly from one lender to the next.

It is therefore advisable to seek the advice and support of an independent commercial finance broker, who along with assisting with the application process can also negotiate on your behalf to ensure you get the best possible deal.

This was posted in Bdaily's Members' News section by iCONQUER Ltd .