What Is A Merchant Cash Advance (And How Can I Get One)?

Berry Mathew

Updated on:

What Is A Merchant Cash Advance (And How Can I Get One)?

Most SMEs occasionally find themselves treading a fine line between periodic financial hiccups and outright cash flow crises. Cash is king for almost all SMEs, but striking the right balance when attempting to maximise profitability isn’t easy.

Research suggests that almost 45% of small business owners find covering every day operating expenses the biggest challenge of all. They have all the ambition in the world when it comes to growing and expanding their businesses, but rarely have enough on-hand cash to cover their immediate costs.

From staff wages to equipment costs to materials to consumables to utilities, almost every penny that comes in is often wiped out before it even arrives; a common problem that plagues the SME community, but also one that can be remedied with a surprisingly straightforward solution.

What is a Merchant Cash Advance (MCA)?

A merchant cash advance is a specialist financial product that effectively combines the benefits of a credit card, an overdraft and a business loan. All with greater flexibility and lower borrowing costs than all three, making it the ideal solution for SMEs. 

With a merchant cash advance, the business is issued a short-term loan against future credit and debit card sales. The money you borrow is gradually paid back over the course of several months, collected in the form of a set percentage of the monthly credit card sales you transact.

This means that you only repay the loan when you take card sales and the amount you repay is tied to the level your business is performing at.

How Does a Merchant Cash Advance Work?

Merchant cash advances work in a different way from traditional loans, overdrafts and commercial credit facilities. They are issued as unsecured loans which means you do not need to put any assets on the line to qualify. 

The funds taken out are ‘secured’ against future credit and debit card sales, but the facility is technically an unsecured loan.

A basic overview of how the process works is as follows:

  1. The business approaches merchant cash advanced specialist with a request for funding
  2. The lender takes a look at their average monthly card transactions over a given period
  3. This information is used to calculate an appropriate maximum loan size for the SME 
  4. An offer is presented to the SME to take out a loan for this amount
  5. The advance is accepted by the SME, and the funds are made available
  6. Borrowing costs are deducted from the loan at the time it is issued, so they SME knows exactly how much the facility will cost
  7. The business can then use this money as they like, with no specific restrictions
  8. Each month, the lender collects a fixed percentage payment of all card transactions processed – typically 10% to 25%
  9. This continues until the money borrowed is repaid, along with the agreed borrowing costs

Because merchant cash advance repayments are tied to actual takings, they can be significantly more flexible and affordable than conventional loans or credit facilities. 

You repay only when business is good and pay less or nothing at all during slower periods. 

Click here – What Career Options Do You Have After An Online Graduate Degree In Chemistry?

How Can I Get a Merchant Cash Advance?

The quickest and easiest way to get a merchant cash advance (and to qualify for a competitive deal) is to speak to an established broker. Your broker will compare the market on your behalf to help you find a competitive MCA and will also negotiate on your behalf to keep the borrowing cost as low as possible.

For more information on any of the above or to discuss your requirements in more detail, contact a member of the team at UK Commercial Finance today.

Click here – Becoming A Digital Nomad