If you’ve been looking for financing options for your business, you may have come across the term “business cash advance”. What is a business cash advance? Is it a loan? And if not, where does the money come from? What is the difference between loans, cash advances and factoring? Keep reading to learn all about business cash advances, what they are, how to get them, etc.
What Is A Business Cash Advance?
- You may have also heard a business cash advance referred to as a merchant cash advance – it's a short-term financing solution for businesses. A cash advance is not a loan, but it is an option if you need cashflow fast.
How Much Can You Get With A Business Cash Advance?
- With a business cash advance, you can get between £10,000 and £100,000. The amount you have access to depends on how much it is projected that the business will make in one month. Generally, the rule is that you can get around 85% of that amount. This estimation is based on how much the business made the previous year. Keep in mind that this only refers to credit card transactions and the income the business makes from them.
How Do Business Cash Advances Work?
The process is fairly simple. Like with a loan, you need to apply for a business cash advance. The application process is easy, and it doesn't take long, which means you can get the money quickly, assuming you get approved. It shouldn’t take more than a couple of days, so if you need money urgently, this can be a good solution.
Before you sign for the loan, you agree on a repayment amount with the provider – typically 20% to 30% more than the amount you borrowed – and a fixed percentage (perhaps 10% or 20%) that will be taken from your income every month. This money is taken from credit card transactions.
The provider will continue to take this percentage from your credit card income until the full amount has been paid. Keep in mind that you won’t be paying the same amount every day – since some days have smaller sales than others, the sum will be bigger or smaller, depending on how many credit card transactions the business makes and how much money it earns from them. Stale sales will result in a slower repayment, in smaller increments, while big sales will result in higher payments and a faster repayment.
This feature is one of the main draws to this type of financing, as the payments are made automatically, and the business owner does not have to keep track of them or worry about not being able to afford to pay. In addition, this system enables the provider to extend advances without additional measures of security like collateral or credit checks, because they have access to the account and take the money regularly.
This flexibility can make a massive difference for a small business that is just starting out, is struggling to stay afloat, or simply does not have a consistent income. There are numerous business niches that have better seasons and leaner ones, so this kind of financing allows them to pay the money off at a steady pace, that they can afford.
What Can You Use Your Business Cash Advance For?
A business cash advance is typically used as a source of urgent cashflow, although occasionally it can be used to support an investment. The reason for this is that this kind of financing often comes through faster than other alternative loans, and it is accessible with fewer requirements and conditions.
While it is easily accessible, it is not recommended for it to become a source of money that you rely on regularly. It’s an expensive, albeit convenient solution for financing, which means it can’t be a long-term option. That is also because the amounts are not massive. If you are looking to get a long-term, high amount, stable loan, you might want to look into a secured loan.
Are There Any Conditions For A Business Cash Advance?
Like with any other financing option, there are some conditions you need to meet in order to be approved:
First of all, you need to have a business where your customers pay with credit cards to the tune of £3,500 per month, minimum.
Second, you need to provide trading statements for the last twelve months, at least.
Then, you need to use a Process Data Quickly Terminal (or PDQ) for payments through cards (credit or debit). You might be asked to change processors.
As you can see, it’s not difficult to get an advance – certainly easier than a regular loan. While a credit check is not needed, the company might ask for rent payments and such, in order to ensure security. But even so, the necessary documents are fewer than for an unsecured business loan from a bank, for example.
How Can You Get A Business Cash Advance?
- A business cash advance is offered by all sorts of different lending companies, each offering something different, so it might be worth consulting a broker. They will be able to compare between offers and come up with the best option for your business needs. You can always ask for recommendations online from people who have used this kind of service before and see what the best rates are, what companies are trustworthy, etc.
In conclusion, a business cash advance can be an excellent financing option for your business, if you need money fast or you’re looking for a source of money for an investment. However, keep in mind that this cannot be your primary source of income or a long-term financing option for your business. The fees are too high for that to be sustainable, which is why this is better reserved for an emergency or an occasional thing. Read more about these advances at the government page, at Gov.uk.
|What business niches use business cash advances?|
|- The retail industry|
|- The hospitality industry|
|- The automotive service industry|
|- The restaurant industry|
|- The beauty industry|