As a business, access to capital is often the key to success but unless you’ve got a stash of cash held in reserve, you might need the help that a merchant cash advance offers. Although there’s various different finance options to explore, such as business loans or credit cards, they’re not accessible to everyone. A new alternative which has only become popular in recent years is a merchant cash advance.
Not as well known as other lines of business financing, a merchant cash advance also known as a business cash advance, can be easier to obtain and in theory, is available to anyone who uses a card payment terminal or in some cases, Paypal. Both small and larger businesses could qualify for this type of funding, with sums from £2000-£500,000 available to borrow (depending on the business income).
- Merchant cash loans: a basic introduction
- What is an immediate cash advance?
- How does it differ from a traditional loan?
- The pro’s and cons of a merchant cash advance
- Staying safe
- Is a merchant cash advance right for my business?
Merchant cash loans: a basic introduction
Every business needs capital from time to time but a bank loan isn’t always accessible, or in some cases, it just might not be the right option. A merchant cash advance offers a very different way of receiving a financial boost but without so many restrictions on the repayments.
In a nutshell, a cash advance gives the lender rights to claim a proportion of your future sales in return for giving you money upfront. Working with the company that provides the card terminal and processes payments, the merchant cash loan lender will receive an agreed proportion of future transactions until the advance plus the fees are paid off.
Not every business will qualify for these kinds of cash boost loans but the qualifying criteria is far more relaxed than traditional finance. The exact requirements will vary between lenders but as a general rule of thumb, you’d need to meet the following criteria:
• UK based company • A minimum of 3-6 months trading (some lenders may require 12 months) • A strong history of card payments with a minimum of £2000-£3000 per month
Some lenders may want to take a look at your own credit history but the checks will be far looser than other types of borrowing.
What is an immediate cash advance?
A merchant cash advance is known by a number of different names but they all work in exactly the same way, offering lump sum capital in return for a percentage of the ongoing business income. Some of the other names you may hear include an immediate cash advance, cash flow loan, business cash advance or Paypal funding.
All of these refer to the same type of business finance where there’s flexible repayments deducted directly from future income.
Do you need to use a physical terminal to access this funding?
In the past, a merchant cash advance was only available to businesses who used a terminal to process their card payments. The lender works with the payment processing company to arrange for the agreed proportion of the terminal transaction values to be sent to them as a regular repayment.
However, in the modern world many businesses are increasingly working in different ways, using alternative methods of payment which are no less legitimate. One of these options is Paypal, a very popular form of online payment processing.
With Paypal, it’s now possible to benefit from advance credit but only if you hold one of their business accounts. You’ll need to have been trading a while and there’s a minimum threshold for business income, but if you tick all the boxes you’ll qualify even without a physical terminal. A Paypal loan works in the same kind of way as any other merchant cash loan except rather working with the terminal provider, they’ll just deduct the money straight out of your Paypal account. The same type of eligibility criteria applies.
How does it differ from a traditional loan?
A traditional business loan is assessed on different criteria than a cash advance and can be harder to qualify for, particularly if you aren’t a long-established business or your credit rating is a bit shaky.
With a cash loan advance, the repayments aren’t a fixed amount and there’s no set term during which the money must be repaid. At the outset a fixed percentage of your credit and debit card will be agreed and this is what will be deducted, regardless of the actual sum. This allows the repayments to ebb and flow with your business and in those months where you’ve earned less, you’ll repay less too even though the percentage will remain unchanged. This means that you’ll never find yourself with a large finance commitment that you don’t have sufficient earnings to meet. This flexibility over the repayments means that it’s impossible to fix the repayment term but the more money you take via card transactions, the more quickly you’ll repay the debt. As a general rule, the higher percentage of your takings that you agree to pay each month, the better terms you’ll receive.
Every type of finance has a cost attached which is agreed at the outset. If you’re desperate for cash to cover a short-term hole in your business, don’t be tempted to skip over the repayment details just to get your hands on the money. A quick cash advance can be obtained but it comes at a cost.
Choosing a lender
Every lender will have their own fees but as a very rough average, you can expect to pay at least 20% in interest on the amount you borrow. In some cases the amount of interest can climb even higher. This is taken from the receipts via your payment terminal so whatever percentage you agree will be deducted automatically at source. Your lender should issue you with a regular, usually monthly, statement showing what’s been paid off and the balance that you have left to clear.
The costs involved in these types of cash advances are agreed at the outset and once the loan is in place they cannot be renegotiated.
Aside from the fixed cost which is calculated as a percentage of the cash advance and added to the amount to be repaid, you won’t have any further ongoing fees. There’s no additional interest to be calculated, regardless of how long the cash advance takes to be repaid. And as the repayments are deducted at source there’s no worries over missed payments either. Some lenders charge a processing fee; this is either paid upfront or added on with the rest of the loan.
The pro’s and cons of a merchant cash advance
It’s fair to say that a merchant cash advice can provide flexibility and an injection of capital into a business which may otherwise struggle to access sufficient money. There’s certainly many benefits to this type of cash advance and for some businesses, it’s the perfect solution. However, it’s always important to make sure you fully understand the small print before entering into any kind of agreement and that means taking a close look at any potential drawbacks.
What are the benefits?
There’s lots of advantages to using merchant funding such as:
• Simple online application (usually) • Based largely on the performance of your business • Fast approval and payout • Flexible repayments which match the performance of your business • No specific repayment term • Available to more businesses than a traditional loan • Can be used for a range of business needs from refurbishments to short-term cashflow gaps • Suitable for any industry • Transparent fees which are calculated at the outset • Potential to borrow up to £500,000 if supported by business performance
This kind of advance finance is deliberately designed to be easier to obtain than traditional business loans. You won’t need to supply the same level of detail that a bank would ask for, such as business plans and planned expenditure. As the approval process is far simpler, it’s much quicker too and the money could be in your account within 24 hours in some cases.
The amount you will be approved to borrow will depend on the value of transactions being processed through your card terminal. However, if you have a high income there’s potential to borrow as much as £500,000. Not all lenders will go this high; some cap their cash advances at £100,000-£200,000 so you’ll need to shop around if you’re looking for a large level of funding.
What are the negatives?
• An expensive form of finance • Will not improve your credit rating as repayments are not recorded with credit agencies
This kind of loan advance isn’t cheap, and although interest rates will vary between lenders you could end up having to pay as much as 25-40%. This means that on a loan of £100,000 the total amount being repaid rockets up to between £125,500 and £140,000, a considerable sum. Therefore if you’ve got a strong track record in your business it’s worth comparing how much you could borrow and how much you’d repay against other types of available credit. One potential alternative is invoice finance but this isn’t an option that’s possible for all.
Another factor to consider is the length of time over which the debt is repaid. If your business performs well and you repay the debt more quickly you’re unlikely to get any financial benefit. The same interest rate is applicable whether you pay the debt rapidly or over a longer period of time; this is because it’s fixed at the outset with typically no discount for fast redemption. There are a few isolated lenders who may offer a reduction for an early settlement but it’s far from the norm and to qualify you’ll have to repay in full within a very short period of time, typically no more than 90 days.
If you’re only likely to need a bit of financial support for a brief period, a merchant cash advance could work out to be quite costly in comparison to other types of short term finance which may be available. It’s a very good idea to compare the market before taking the plunge as you might find an alternative which is more suitable.
Your future business income is an extremely valuable asset and one which should not be underestimated. It’s very easy to be less diligent when signing away the rights to some of this potential income than you would be if asked to hand over a portion of your bank account yet it’s critical to remain cautious.
One of the potential problems is that the merchant cash industry is not yet regulated; this is because it’s not considered technically to be a loan. While this provides lenders with more freedom to offer terms to their customers, it means that this type of borrowing can have an element of risk.
As a merchant cash advance can often mean big sums of cash, it’s important to be absolutely sure the lender is scrupulous, honest and legitimate but being an unregulated industry can make this difficult. However, although merchant cash advances may not be a regulated transaction, there’s many other types of transaction which are and your potential lender may also offer these. If so, you’ll be able to find them on the FCA register. Whilst this may not mean that the merchant cash advance is being regulated, you can check the history of the company to see if they’re registered and authorised for other types of financial transactions. This should provide some peace of mind knowing that they’ve demonstrated to the regulator that they are trustworthy and reliable, albeit for different products.
Companies that don’t offer any other type of lending or finance probably won’t be listed on the FCA register, giving you no way of verifying whether they’re authentic. If this is the case, proceed with extreme caution before handing over your personal information. You might want to consider finding an alternative provider who is on the FCA register and who has a checkable track record.
Is a merchant cash advance right for my business?
This type of finance is very flexible and can provide a fast cash injection which can be used for any business purpose. However, the repayment fees are typically much higher than other types of borrowing. Whether a merchant cash advance is right for your business depends on various factors including the length of time you need the finance for and whether you qualify for any alternative sources of borrowing. Any kind of finance should be entered into very carefully and it’s essential to compare various lenders and alternatives before deciding if it’s right for you. Here are 5 Reasons to Go for a Merchant Cash Advance Loan.