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What is a Merchant Cash Advance?

Published on 4th July 2017 - Last update on 23rd November 2018

Business owners have never had it so great when it comes to arranging finance for their businesses. From Business Loans and Asset Refinance to Invoice Finance solutions, the array of choice on offer is vast and continues to grow wider by the day. However, with so much to consider, understanding how each business finance product can work alongside your business can be time-consuming and frustrating. But one product that confuses potential borrowers more than any other is the Merchant Cash Advance. So to clarify, the business finance experts at Rangewell are here answering the question: ‘What is a Merchant Cash Advance?’

What is a Merchant Cash Advance?

Sometimes referred to as the loan that’s not a loan, you can be excused for feeling lost and confused. Yet, if there were any similarities between Merchant Cash Advance and your traditional bank loan, or any other business finance product on the market, it would be that you receive a lump sum. Other than that, Merchant Cash Advance completely throws out the rule book and works around your business in its own, unique way.

A Merchant Cash Advance is designed to work by using your business’ monthly credit and debit card sales. Your card sales will be used to determine everything from whether you can afford the product, the size of the lump acquired and how the product is repaid. As such, it goes without saying that the minimum requirement for a Merchant Cash Advance is to be able to support card sales, whether in-store or online. Nonetheless, this makes it an ideal match for many UK business sectors including Retail, Catering, Beauty, Healthcare to Hospitality.

How does Merchant Cash Advance operate?

One of the great features surrounding Merchant Cash Advance is the way it can be used to support and bolster areas of your business. Just some of the ways this type of finance can be used to your business’ benefit include providing additional funds for starting or completing business projects, capital injections, asset purchases, hiring professional services and much more. Subsequently, due to the product’s unique flexibility, there’s no limit to the potential a well placed Merchant Cash Advance can grant you.

Another reason for why Merchant Cash Advance is so useful is because of how fast it is to apply, with decisions and any relevant funds usually being transferred in as little as 48 hours. Rather than digging out piles of paperwork and presenting both your credit score and business history, all that matters is your sales reports. When applying to a potential business lender for an advance they will request to see 3 or more of your business’ consecutive sales reports. This is necessary as it allows lenders to develop an understanding of your monthly card-based sales and customer spending patterns. Should the lender like what they see and decide that your business can afford the product, they’ll agree to offer you a lump sum. Using your sales reports, lenders will develop an average that allows them to predict how much revenue you could generate during an upcoming month. As such, if your business regularly takes card sales worth in the region of £5,000 then the potential lump sum on offer could lie within that region.

How to repay a Merchant Cash Advance?

From here on, you’ll be subject to a Flexible Monthly Repayment plan that takes into account the lump sum acquired, fees and interest. Unlike other business finance products, such as your traditional business loan, you do not pay a set amount at the end of each month. Instead, the amount taken is determined by how many credit and debit card transactions your business carried out in that month.

For example, if a lender was to offer you a rate of 18%, that would mean they would deduct 18p from every £1 your card-paying customers spend during each transaction. Automatically collated to repay the lender, sparing you the need to scrape together large amounts of cash each month, the amount taken each month could vary significantly, depending on the number and value of card transactions carried out.

So, due to the product’s unique flexibility, there are no terms as such, but most business’ that are accepted for a Merchant Cash Advance tend to repay the product within 6 – 12 months. What this all means for your business is that you aren’t made to pay more than you can afford in any concerned month, allowing you to better protect your business’ capital.

Our values are simple – We’re on your side.

At Rangewell, our services are clear and transparent. We support a wide range of SME businesses of every shape and size, for finding every type of finance. Follow us on Twitter and LinkedIn for business tips and tricks, and feel free to call us on 0203 637 2340 if you’d like to chat about what we can do for you.

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David Harrison

David Harrison

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