How Does a Merchant Cash Advance Work?
Ok, so a merchant cash advance is a flexible way to release funding against your future income.
In short, the lender works out what you earn through card sales and then offers a maximum facility, which you can borrow against, as you need to.
Your repayments are taken automatically from your card transactions through your terminal, usually a percentage of sales.
That means the repayments go up or down as your sales come in and won't overstretch your budget.
A merchant business loan is attractive since it's much easier to apply for than many alternative business finance products and means you can access a loan even if you have minimal assets or a limited credit score.
Cash Flow Support With Merchant Business Loans
The significant difference between merchant business loans and other borrowing is that it bases your lending on your future income.
There are a few different forms of a merchant loan, but usually, a merchant cash advance is the most common.
You can also apply for the same product under different names, such as a turnover loan, revenue loan, or revenue-based financing.
While we call it a loan, a merchant cash advance isn't quite the same because you don't have an outstanding balance, interest rate and term end date to factor in.
Instead, you can request an advance on the funds you know you will receive from sales before the transactions happen.
Do I Qualify For a Merchant Cash Advance UK Account?
If you take out a regular business loan, you'll get a lump sum of cash and then pay interest on the remaining balance until the total value has been repaid.
This concept applies to most lending products, including:
- Repayment mortgages
- Overdrafts
- Loans
- Revolving credit facilities
A business cash advance is an innovative alternative because it responds to the need and trade of the company.
For example, if you sell 50% of your products at Christmas and make a huge profit, you might be cash flow rich in the winter and have significant issues financing production during the summer.
The merchant business loan doesn't calculate a total interest charge and levy it against every repayment, according to the loan balance.
Instead, you agree on the cost of the finance, and that fixed amount decreases depending on how much of your facility you're using.
Usually, you qualify if you can demonstrate the trading history, receive payments via card, and make enough sales to repay the debt, albeit gradually.
Example of Merchant Cash Advance Loans
Perhaps the easiest way to understand how merchant cash advance UK loans work is to run through an example!
Business B needs to borrow £10,000. They're offered the loan at 20%, with a total repayable of £12,500 - so far, it sounds a lot like a standard loan.
But the 20% figure isn't the interest rate; it is the percentage of sales used to repay the debt.
Lender B makes three sales, so:
- Client X buys something for £10. Business B keeps £8 and pays 20%, £2, to the lender.
- Client Y places an order for £150. The business retains £120 and pays £30 back against the cash advance.
- Client Z buys goods for £600, and so the lender gets a £120 repayment, and the business holds onto £480.
Business B has repaid £152 by the end of those three sales, so the balance owing is £12,348.
Each day and every card sale, 20% of the proceeds are taken as repayment, and the total balance of £12,500 won't change or incur additional interest charges until it's been paid in full.
This system works for many businesses because they can pay back more when sales are high and less when they're low. The cost of the financing doesn't change, and there is no compound interest chargeable.
Can I Get a Business Cash Advance Debt Consolidation Related?
Most businesses use a business cash advance to raise working capital. However, you can use the loan in any way that suits your company.
From the lender's perspective, provided you have a history of customer card payments, they can see that the business will repay their debt, plus the agreed interest charge.
Therefore, they won't usually reject an application because it's for debt consolidation - and this can be highly beneficial if you're paying steep interest charges for short-term debt.
A merchant cash loan can repay debt in one go, reducing the interest charge and enabling you to restructure that finance to repay gradually through customer card payments.
Most lenders will work with the terminal provider to integrate the repayments.
They can see how many transactions are made and watch the balance drop down as you receive new sales.
Even if you've had credit issues before or been turned down for a typical bank loan, you will likely qualify for a merchant cash loan to consolidate debts and ease the strain on your cash flow.
However, the maximum you can borrow depends on your turnover and how much the lender believes you can afford to repay without running into further difficulties.
What Are the Eligibility Criteria for Merchant Cash Loans?
Qualifying for a merchant cash loan is much easier than for most other forms of business finance. You'll need:
- A card payment terminal.
- To receive card payments from customers.
That's pretty much it, and any business that takes debit or credit card payments through any brand of terminal can qualify.
Note that lenders will all have their internal policies, so the maximum you can borrow in this way may vary.
What is the Application Process For a Merchant Loan Advance?
The first place to start is to work out exactly how much you want to borrow - and what you need that cash for.
It's much easier to calculate a loan application value for a specific purpose, such as buying an item of machinery or paying back another short-term loan.
If you're looking to supplement your cash flow or finance business growth, it might mean a bit more planning to come up with some accurate forecasts.
Lenders will look at your average monthly income, and there are many different repayment lengths and percentage deductions out there to choose from.
Once you know what you'd like to borrow, give the Revolution team a call on 0330 304 3040, and we'll get to work comparing the most suitable deals on the market to get your merchant loan advance agreed.
Are There Benefits to Using Credit Card Merchant Loans?
Credit card merchant loans are beneficial for several reasons.
The primary advantage is that the finance is scalable, and links back to your business transactions, so you aren't under any pressure to pay back the same amount, even in months where business is slow.
Most lenders offer flexible terms and automatically take the repayments, so you don't need to process manual transactions.
However, there are a few limitations to bear in mind.
- The maximum you can borrow is dependent on your cash flow.
- It might not be the best option if you take payments in multiple ways.
- Lenders need you to process transactions through the same terminal (or linked terminals).
The fees can be higher than conventional financing forms, but that might be a bonus if you need a static repayment value.
How Quickly Can I Get a Merchant Cash Loan?
Merchant cash advances are very fast to organise, and you'll usually get a decision back in just one or two days.
If you need cash quickly and can't wait for weeks to apply for a loan or mortgage, it might be the best solution for your business.
Applications are relatively stress-free, and you don't need to prepare vast volumes of paperwork.
There usually isn't any need to offer up an asset as security, so you aren't risking your business premises or equipment as you do with a secured loan.
The automatic repayments mean you can't fall foul of late charges, and there isn't any minimum, so you keep chipping away at the balance.
However, there are thousands of business loan options, so please give us a call if you'd like to analyse the rates available, as another product such as asset finance or a revolving facility might work out cheaper, depending on your circumstances.
Can a Broker Help Me Assess Business Cash Advance Loans Reviews?
We always recommend any business consult an independent, whole-of-market broker before making decisions about applying for a business cash advance loan.
Funding solutions vary and need to be aligned with your business expectations, so it's vital you go into any borrowing scenario with full awareness of the pros, cons, fees and alternatives.
There are many review sites online, but we'd also advise against relying on price comparison platforms.
Those sites usually advertise only lenders who pay to be there, showing a tiny market snapshot.
Is a Business Cash Advance Right For My Company?
A merchant cash advance might be right for your business if you need financing but experience changes in the number of sales you achieve each month.
Many sectors see seasonal peaks and dips, making a regular loan challenging to keep up with during slower periods.
Therefore, if you take payments via card and want a flexible loan that won't put a strain on your cash flow, a business cash advance could be the best solution.
Are Merchant Credit Card Advance Loans Better Than a Normal Loan?
As we've explored, there are pitfalls and advantages to every business loan! One isn't always better than the other, but they're suited to different company needs.
Let's run through some of the most compelling reasons to consider a merchant credit card advance loan.
Merchant Business Loan Flexibility
A merchant advance is flexible, so you only pay it back when you make a sale. If you sell nothing, you repay nothing and don't incur any extra interest charges as a result.
Repayments correspond with your sales, making it ideal for companies whose income changes from month to month.
Fast Financing With Merchant Loan Services
Because a merchant loan is linked to your future sales, the critical piece of information is a report showing your average card transaction values.
While lenders vary and application criteria apply, you can often have a merchant cash advance in just a day or two.
Security Requirements on Merchant Loans
One of the significant challenges for smaller businesses, or those without assets, is that it's pretty impossible to find a competitive loan or take out any secured loan product.
Merchant loans do not require security, so you qualify even if you have no tangible assets.
Applying for Credit Card Merchant Loans
The application process for a credit card merchant loan is one of the most straightforward out there. Lenders will typically look to your merchant statements to get an idea about your sales patterns and values.
In some cases, the lender can access your trading information online through your payment terminal, making it even easier!
Using a Merchant Cash Advance With Bad Credit
Merchant loan providers aren’t as concerned with credit reports as any other bank. Their primary concern is your card sales, so you're more likely to be approved with a poor credit rating than most forms of business loan.
Risks Associated With a Merchant Cash Advance UK Account
While merchant loan services aren't always the lowest cost, they carry little risk. Repayments are deducted from sales automatically, so you don't have the risk of falling behind with payments or incurring penalty charges.
Managing Repayments on Merchant Cash Loans
Finally, when you take out a merchant cash loan, you know what you'll be repaying from day one.
There aren't additional fees, monthly interest charges or an increasing balance - you know the total cost from the start, and that amount doesn't change until you've paid back the debt.
Which Merchant Loans UK Should I Apply For?
Like any business loan, you can take out a merchant cash advance from a wide number of lenders.
That includes online transaction providers, niche lenders and alternative business loan providers, so there is a lot of choice!
It's crucial to compare the rates available, as you could save a considerable amount by applying to a merchant loan service with lower interest charges.
If you're interested in learning more or receiving advice about whether a merchant cash advance is the best loan for you, please contact Revolution Brokers on 0330 304 3040 or email us at [email protected].
