The Pros and Cons of Merchant Cash Advance

The Pros and Cons of Merchant Cash Advance

July 4, 2017

Access to key sources of funding is vital for the development of any business, regardless of its size or sector. There are so many finance solutions available thanks to the rising prominence of the Alternative Finance Industry, that knowing which solution offers the greatest benefit to your business can be bewildering. Yet, nonetheless, as business owners, it is our duty to source the most appropriate form of business finance in order to ensure growth and long-term success. However, if you apply for the wrong type of finance it can have any number of negative effects, hindering both growth and long-term success. That’s is why possessing a thorough understanding of what you’re signing up to is vital.

An extremely useful, but often misunderstood, form of business finance is Merchant Cash Advance, also known as Business Cash Advance. So, to demystify this exciting financial product, Rangewell is offering you an in-depth insight into the inner workings of this financial product. By weighing up the pro’s and con’s of Merchant Cash Advance you’ll be in a much stronger position when deciding whether it’s the most appropriate match for your business or if another product would be more beneficial. After all, knowledge is power, no?

What is a Merchant Cash Advance?

A Merchant Cash Advance (MCA) is a popular means of acquiring a lump sum on the back of your monthly credit and debit card sales. Contrary to a number of misconceptions, Merchant Cash Advance is not a loan despite the fact that you’re offered a lump sum. This is because of the way it is applied, operates and eventually repaid, all which makes it very different to the more typical business loan.

In order to qualify for this type of business finance your business must be able to support credit and debit card sales. When applying, business lenders will also request to review your sales reports for 3 or consecutive months, allowing them to garner a greater understanding of your card paying customers’ habits. This also helps lenders when considering whether or not your business can afford a Merchant Cash Advance.

Should a lender agree, they will go on to use your submitted sales reports to calculate an average. The average is what forms the basis for how large a lump sum you could receive directly into your business. In a sense, what this allows the lender to do is purchase the potential revenue generated for an upcoming month at discount. That said, once you have received the lump sum you can use it in however way you see fit, including growth projects, hiring professional services, as a capital injection or even help to fund marketing campaigns. The possibilities on offer to your business are endless.

Now this is the area that really turns the idea of a business loan on its head. Rather than taking a fixed sum at the end of each month for an agreed term, a Merchant Cash Advance is repaid using your monthly card sales. For example, were a lender to offer you a rate of 18%, this translates into 18p from every £1 spent by your card customers each time. As such, this means that your card customers are actively paying off the product on your behalf. It is worth noting, however, that rates can vary from lender to lender.

Plus, because of the way in which money is collected to repay the lender, the amount taken through the course of each month varies. If your business was to see a slump in card sales during the month, then the amount taken goes down, but should you, instead, see a rise in card sales than the amount repaid goes up. Because of how this mechanism works in tangent with your business, it helps to relieve the burden on your capital, unlike other finance products.

What are the benefits of Merchant Cash Advance?

There many reasons for why business owners choose to implement a Merchant Cash Advance solution for their business. As well as the flexibility that it offers your business, there many other perks that make it such an attractive finance package.

Merchant Cash Advance is one of the fastest and easiest finance products to apply for on the market, providing your business can show that it can afford the repayment scheme. More often than not, decisions and monetary transfers are made within 48 hours of applying, making this is an extremely fast means of accessing external funds.

Because of how lump sums are calculated, using your sales reports to come up with an average, there’s no fixed limit to how much money your business can borrow. As such, the determining factor in this particular area is the scale of your operation or, rather, the amount of card sales you’re generating each month. This means that a Merchant Cash Advance solution can be highly beneficial no matter where your business stands in its development.  

Plus, unlike other methods of business finance, Merchant Cash Advance lenders only care about your business’ ability to repay the product. As such, little attention is given to your credit score and business history. All that matters is the quality of your monthly sales reports, reducing the need to sift through piles of documentation and bank statements, saving you time.

In addition, because of the way in which the repayment process functions it’s much gentler upon your business finances. Rather than having to worry about paying fixed monthly sums at the end of each month, Merchant Cash Advance takes only a percentage of your monthly card sales, making for a much more fluid means of repayment. So should your business see fewer card sales on a particular month the amount removed from your revenue is reduced and vice versa.

So to summarise:

  • Decisions often made within 48 hours of applying
  • Lump sum subject to how much revenue your business generates each month
  • Little or no concern paid to credit score and business history
  • No fixed terms, pay at your own pace
  • Flexible repayment scheme
  • Transactions paid for in cash aren’t counted in the repayment scheme

What are the cons of Merchant Cash Advance?

As well as the many lucrative benefits, there are also some other factors that you need to consider carefully. Before entering any agreements it is vital that you know and appreciate the areas that could lead to cause for concern. However, by being aware of them beforehand you’ll be in a position to manage them or consider other, more viable financial arrangements for your business.

It is worth noting that Merchant Cash Advance can be expensive, often featuring high interest rates and fees. Before signing any agreement ask to review the factor rate as this will show you how much extra you’ll be paying during the repayment process.

Although many business owners may enjoy the flexibility that a Merchant Cash Advance solution offers, others may see this as a potential issue. This is because of the variable nature of the amounts intercepted to fund repayments, making it difficult to budget effectively and plan for future growth projects. As such it could potentially result in a slower growth rate.

In addition, Merchant Cash Advance solutions aren’t subject to usury laws meaning it is possible to get hit with unfavourable terms and conditions through the course of the agreement. In order to help minimise the potential of this occurring it is worth pushing for guarantees to be written into the contract, giving you an extra layer of protection. But, ultimately, it comes down to sourcing a lender that has a reputable reputation.

Lastly, it worth noting any transactions carried out with cash aren’t deducted to repay the lender. Although it may seem a good idea to encourage your customers to pay via cash, doing would be classed as a breach of conditions. As such, it is recommended that you adopt a neutral stance and allow customers to pay using whichever method they prefer, without using promotions to coerce them to pay a certain way.

So to summarise:

  • Can work out more expensive than other business finance options
  • Not subject to usury laws
  • Encouraging customers to pay with cash is a breach of condition
  • Effective budgeting is difficult

Is Merchant Cash Advance right for my business?

This really depends on what you value most in such an agreement, and the speed of its arrival. If you suffer from a low credit score, have a poor credit history or simply require the money right away for an emergency, perhaps a Merchant Cash Advance is the way forward. Or, if you prefer being able to budget and aren’t keen on the high interest rates then perhaps seeking alternatives may be a more viable option?

As always, discerning which finance solution is most appropriate for your business can be a struggle. With so much to choose from and numerous factors to consider, the pressure this puts you under can be immense, removing your attention away from key areas of your business. That’s why more and more business owners are choosing to source business finance with Rangewell. With our services and expertise, we can help source the most appropriate and affordable finance solution for your business, including Merchant Cash Advance and a diverse array of business loans, all bundled with highly competitive rates to match. So no matter what your goals are, Rangewell is extending a helping hand and leading the way to a brighter tomorrow.

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

Content writer