How to consolidate debt with a business cash advance

With 39% of UK-based small to medium businesses using external sources of funding and SME bank loans in the UK reaching a total value of £59.2 billion in 2023, it’s no surprise many businesses are looking for new ways to consolidate debt.

If a business cash advance has caught your eye, here are some of the things you might need to know before settling on this option. 

What is a business cash advance?

A business cash advance, more often referred to as a merchant cash advance, is where a lender provides a lump sum today (hence “cash advance”) in exchange for a percentage of future revenue.

How can a business cash advance help with debt consolidation

Multiple debts can become a headache to manage. Organising due dates, ensuring cash goes in the right place at the right time, and keeping an eye on any interest rate boosting renewals isn’t always easy. Not to mention, when you’re juggling multiple debts, it’s not uncommon for one or two to fall between the cracks, resulting in a missed payment. 

Debt consolidation is a possible answer to this predicament. This is where you take all those debts and pay them off with one, usually new, loan.

So where does a cash advance fit in?

A cash advance can fill the role of said loan without adding a debt burden in the traditional sense. Instead of taking out a business loan, you’re trading future sales for cash today. That means you may be able to pay off all your existing debts, consolidate that monthly money into one recurring payment, and then tie that to revenue, rather than taking out a new debt with varying interest rates. 

Pros of using a cash advance for debt consolidation

There are many advantages to a cash advance, including:

Speed

This funding type is quite fast in nature. Depending on the lender and their decision and approval process, you could potentially have the funds in your account within a few days.

Cash flow

Structuring the funding as a percentage of future earnings can help support cash flow as you’re only paying as your customers pay you. So, if there’s a slight downturn, you may be able to scale down, and if business does well, you could pay off the advance more quickly.

Possible drawbacks to be aware of

It’s also important to be aware of the risks and drawbacks of a business cash advance, including:

Cost

Cash advances are not always cheap. To understand the cost of a cash advance it’s important to be aware that unlike business loans, charges aren’t made via interest rates in the way we usually think of them. Instead, merchant cash advances include a set amount at the very beginning of setting up the finance. 

Let’s say you want to take out £30,000. The total amount you might pay back could be, say, £36,000. In this case, the cost for taking out the advance would be 20% of the finance. You would then pay the agreed percentage of revenue as it comes in and then the payment would be complete when the full £36,000 had been paid off.

Debt cycle

Consolidating debt can be good – if you’ve collected a healthy amount of debt and want to streamline or if you want to pay off your loans in a measured manner. However, some businesses take on too much debt and then take out new debt to pay off the old debt, and they continue to do this until they’re trapped in a debt cycle. If you feel this has happened to you, consider getting help from advisors before taking on any further financing.

Find a merchant cash advance with Funding Options by Tide

We help facilitate merchant cash advances by connecting eligible borrowers to our network of over 120 lenders offering between £1,000 and £20M. Just click the link below and submit your information to find out if you’re eligible for a merchant cash advance.

Find a merchant cash advance.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.