If you’re looking for finance but can’t access the conventional options, a business cash advance could give you the help you need. Unlike the more traditional ways to borrow money, a business cash advance provides the means to levy future earnings for current use. Although it’s frequently used as a short term loan, in reality you’re just using your own income before it’s received. This is one of the reasons it’s referred to by some lenders as a cash advance for business rather than a loan.
You may have ruled out the idea of getting finance because perhaps your credit rating isn’t perfect, or you’re a relatively new business. However one of the major advantages of business cash advance loans is that they can be accessed by those who wouldn’t qualify for traditional finance. Available to both online merchants and those with physical presences, this type of borrowing could provide a business with up to £500,000 of capital.
- The Basics of Business Cash Advances
- How do Business Cash Advance Loans Work?
- What You Should Consider
- Reasons To Choose a Cash Advance
- Protect Yourself
- Checklist For Choosing a Lender
- Should I Take Out a Business Cash Advance?
The Basics of Business Cash Advances
You may well be familiar with business loans but this type of borrowing is something different entirely as it’s based on the money you’re likely to receive in the future. If you only accept cash payments, you won’t be eligible. You’ll need to either accept debit and credit cards or use an online payment processing facility such as Paypal.
This type of borrowing is secured against future income which is simply deducted as it’s received, with variable repayments which fluctuate with the money you receive. This provides much more flexibility and means that your business won’t be committed to fixed payments which could be difficult to meet.
How do Business Cash Advance Loans Work?
Merchant cash advance, business cash advance, Paypal loan or advance finance; these are all different names to describe the same type of borrowing. Not a traditional type of loan, but nevertheless a way for businesses to access capital to help them through short-term cash flow problems. The reason you might need the cash doesn’t matter too much; the money could be used for anything from a refurbishment to bridging the gap in your finances.
With this type of borrowing, you’re agreeing to release a portion of your future income directly to your lender. This income must be received via either a card processing terminal or an online payment processor, such as Paypal. You won’t have to sacrifice all of your future income, just a small portion which you’ll agree upfront. This will be a fixed percentage of your income rather than a monetary sum. The advantage of this is that as your business income varies, your payments will vary too. This means you’ll never be left facing a big bill at the end of the month that you don’t have the income to meet.
Does My Business Qualify?
As mentioned above, it’s possible to qualify for a business cash advance even if you haven’t got the most robust track record. The extent to which your past credit rating affects your ability to borrow money will vary depending on the lender but many don’t base their decision on your personal history. As the money will be deducted directly, there’s far less risk for lenders to have to consider.
You won’t need to submit complex business plans or sit down with a business advisor to prove your case; applying for a cash advance can be done entirely online with an application which is surprisingly simple.
There will be a few criteria that lenders will be checking for. They’ll want to see that you:
• Are a UK based business • Have at least 3-6 months history of trading (some lenders will require up to 12 months) • Have a provable track record in receiving card/Paypal payments
The above are the minimum criteria that lenders will check for but some will have slightly tighter requirements such as a minimum income threshold each month in card revenue, typically around £2000-3000. You might find that you’re asked some questions about your past credit history but the decision won’t be primarily based on your personal rating. Even if you’ve had some major credit problems such as bankruptcy, you may still be eligible for a business cash advance.
The single most important factor that lenders will want to be sure of is continued revenue which will be received via your card processing terminal or Paypal account.
How Much Will it Cost?
A fast business cash advance can be very easy to obtain with a rapid online approval process but it’s essential to make sure you fully understand the terms before you sign on the dotted line. Finance is never offered for free, so you’ll need to check the cost of a business cash advance before you agree to pay.
Unlike more conventional loans, you won’t need to repay a fixed amount at the end of the amount as a business cash advance is calculated on the income of your business. The lender will take a fixed percentage of your card revenue, and will work with your card processing company to receive their money. This makes it easier as you won’t have to physically organise a payment yourself at the end of each month. The percentage that you pay can usually be negotiated; as a general rule of thumb the more that you agree to pay off each month, the lower the charges will be. This percentage amount remains fixed for the duration of the finance, which means that what you actually pay will fluctuate depending on how much your business earns.
Of course, as well as the amount of revenue you agree to sacrifice each month you also need to take into account the charges that apply. These will vary between lenders so it’s a good idea to do your homework and research the market well. This isn’t the cheapest form of borrowing available so expect to pay from 25% to 40% in charges.
Although a cash advance for business can work out to cost more, you will know from the outset exactly how much you’ll have to pay. It’s a transparent form of borrowing and you won’t have new charges heaped on you each month like a credit card. Just like the percentage that you have to re-pay, the charges are fixed at the start so you’ll know exactly how much you’ll have to pay back.
What You Should Consider
A small business cash advance isn’t the right type of finance for everyone so it can be helpful to run through the pros and cons before you make your final decision. If you decide to go ahead you’ll also need to make sure you choose a reputable lender; you’ll be providing sensitive data about your business and it’s important that it’s treated with integrity.
Reasons To Choose a Cash Advance
A business cash advance loan can-provide an injection of capital at a critical time, helping either to bridge short term difficulties or funding a bigger project. Accessible to more businesses than conventional forms of borrowing, there’s lots of benefits to choosing a cash advance. Here’s some of the main advantages:
• Fast and simple application process which can be completed online • Minimal eligibility criteria • Not based on personal credit checks • Rapid approval times • Quick payout • Variable repayments which match the income of your business • Ease of organisation; money collected directly from the source • Suitable for both small and large lending, typically £2000-£500,000 available • Finance calculated on the revenue of your business • Can be used for any business purpose • Accessible by any industry • Transparent payment structure agreed at the outset • No additional fees • Available to more business than traditional lending
The exact advantages will vary from one lender to another and the amount you can borrow will depend on their criteria and the past performance of your business.
Drawbacks To Consider
Cash advances are a type of finance that are regularly used by businesses all over the world but it’s important to understand that there are some disadvantages. Here’s a run-through of the main drawbacks to factor in:
• It’s an unregulated form of finance so there’s less security • Not the cheapest way to borrow money • Won’t improve your credit rating
Financial experts often recommend using finance as a way to rebuild a poor credit rating but this type of borrowing won’t help. Repayments aren’t reported to credit reference agencies so it won’t improve your record.
Although the process is smooth and easy, a cash advance can be a relatively expensive way to borrow money. If you’ve got a strong and established business, you might want to explore other forms of lending as well to make sure you choose the best option.
Business cash advances are not a regulated activity which means that lenders have far more freedom to offer you personalised terms that meet your needs. However, the downside is that you’ll have no assurances that the lender you’ve chosen can be trusted. Signing away your future income is not a decision to take lightly and you should be just as diligent as if you were giving a lender access to your bank account.
One way to remove some of the risk is to choose a company that’s listed on the FCA register. This is a free register that’s available to the public. However, only companies that are regulated by either the Prudential Regulation Authority or the Financial Conduct Authority will be listed. A company that only offers business cash advances won’t be listed on this register because it’s not a regulated activity. However, many finance companies offer a range of products and although cash advances aren’t regulated, other types of lending is. This means that you’ll be able to check out the history of the lender and also whether they still hold a licence to provide credit.
If a business only provides cash advances, you won’t be able to check them on the FCA register. However, this means you’ll have no way of knowing whether you’re trusting your finances to a legitimate lender. If you opt to use a company which isn’t authorised by the FCA for other forms of credit, you should take extra steps to safeguard your security before handing over any money or sensitive information.
Checklist For Choosing a Lender
If you’ve done your homework and decided to go ahead with a business cash advance, here’s a handy summary of the things to look out for in a lender:
• Negotiable repayment rates at the start; some lenders allow businesses to choose how much they want to pay back • Competitive fee structure. With between 25-40% in charges, there’s a huge scope and paying at the upper end could cost you thousands more • Paypal cash advances. If you operate online rather than in physical premises, you’ll need to look for a lender that offers the same type of finance using Paypal as a base • Regulation. A lender that offers other types of loans will be regulated, reducing the risk • Eligibility requirements. Although the basics are all the same, some lenders are stricter than others. If you’re a fairly new business, you may need a lender who is willing to accept a shorter transaction history. • Amount. If you’re looking to borrow a large sum of money, you may need to check out several companies. Not all lenders offer finance at the top end of the market. • Early redemption. Some lenders reduce the cost if you settle the loan early while others still expect the full cost of the finance to be paid.
Don’t base your decision on the lender that has the quickest or easiest application process. You may be keen to receive the cash but if you tie yourself into a contract simply because there’s a fast payout, it may end up costing you thousands more in the longer term.
Should I Take Out a Business Cash Advance?
Only you will be able to decide whether this type of finance is right for your business. Although it’s fast and flexible, borrowers will have to pay more than with other types of business loans. If you only need the cash for a short time, you may find other forms of borrowing more suitable for your needs. Sacrificing a portion of your future card or Paypal revenue should be taken as seriously as any other form of finance, and that means comparing all the available alternatives before reaching a decision. For more information take a look at our guide- What is a Business Cash Advance?