Merchant Cash Advances, how they work and 7 benefits for your business

Merchant cash advances (MCAs) are a relatively new and alternative funding option. As the name suggests, a payment service provider (PSP) lender might lend your business a lump sum cash advance based on your activity and history as a merchant with them.

It’s a straightforward option, you pay back the merchant advance over a limited period, and your repayments get debited from the payments you receive in the future from your customers.

Here we’ll explain how the cash advance works, who offers them and seven of the benefits for your business. You’ll then be able to make an informed decision if the option is right for you and your business. 

Seven benefits of a Merchant Cash Advance

There are many benefits of MCAs and very few drawbacks. Let’s consider seven standout reasons why this funding option may be the right choice for SMEs. 

1. Quick decision

2. Suitable for businesses with short trading histories

3. Flexible terms and amounts

4. Your choice of how to use

5. Competitive interest rates

6. Builds up a credit history

7. Works alongside other funding streams

1: Quick decision

Payment service providers make tens of millions of lightning-quick transactions through terminals daily, so when deciding whether to advance your business a lump sum, they can also act quickly. The turnaround of your application is typically within 48hrs, but it could be quicker.

If you’re already a merchant, then you’ve jumped the first hurdle because lenders have strict criteria before allowing you to take card transactions through a terminal.

You and your business will have undergone credit checks during the onboarding process, so you could be in a favourable position to get the cash advance, particularly if you’re already busy transacting payments through your terminal.

2: Suitable for businesses with short trading histories

PSP lenders know their business; for example, they’re experts in the retail business sector, their biggest source of business income. They have intel at their fingertips to know who’s most likely to succeed based on data such as turnover etc.

The high street is their bread and butter, and there’s a lot of competition to get startups signed up. Therefore, they can be prepared to take more risks on a new venture than traditional sources of finance, such as high street banks.

If you’ve only just started trading, you could find the payment processing lender is favourable to your request for a cash advance; after all, they have an interest in seeing you succeed. If you hit the ground running and quickly start to process many payments, you could be in an ideal position to obtain a cash advance. It’s worth noting that an MCA is an unsecured facility; you don’t have to put up assets as collateral. 

3: Flexible terms

Merchant cash advances are different to conventional business loans because instead of having an outstanding loan amount, interest rate, and term, a cash advance effectively sells future sales to the lender at a discount. So, your payments will be directly proportional to the amounts you process through your card terminal; you pay back through a percentage of your customers’ card payments. 

This payback method can be an excellent choice if you have quieter trading periods, for example, if you’re a seasonal business. You could regard the advance as the perfect match for your business because your payments increase when you have more customers and generate more profit.

The lender typically charges a percentage taken from each payment you accept. You also have the possibility to clear the advance more quickly depending on the volume of payments you're processing through the card terminal, thereby reducing the overall interest you’ll pay. It’s worth noting that the lender might insert a sunset clause, a date set in the future to clear the advance.

According to the British MCA Association (BMCAA), payment service providers start advances from £2,500. At Funding Options, we have lenders that lend up to £1m, depending on your turnover, so there’s a choice to match all sizes of businesses.

You’ll agree to the repayment percentage in advance, and the BMCAA suggests you should expect to pay between 10%-20% of each sale you handle through the terminal.

You can discuss daily, weekly or monthly payments with the service provider, whichever suits your business most, and you’ll never have to worry about making repayments because they get taken at source.

Shopper making a payment via a card terminal

4: Your choice of how to use the advance

The payment processing firm will not specify how you spend the advance. Whatever you spend it on should be good for the business and, in turn, hopefully, increase your bottom-line profitability and overall performance. You can spend it as a cash flow injection, use it to buy equipment, decorate your premises, or take on more staff, etc.

5: Competitive interest rates

The rate you get charged will depend on various qualifying criteria, such as the lump sum you get, the length of time you’ll pay it back, and the risk assessment the PSP attaches to your business after a credit check.

Different lenders have different rates, so if you’re either out of contract with your c or coming close to a renegotiation of the terms and costs, you may be able to shop around to get the best deal.

The rates may not be as reasonable as a traditional bank loan; however, there are pros and cons. The advance is unsecured and flexible. The processor doesn’t need an in-depth analysis of your complete trading history; your card processing history and a light credit check might be sufficient.

6: Build up a credit history

If you’re a new business, then getting credit can sometimes be challenging. If you’re already a merchant with a payment provider, then you’ll have undergone some checks.

Taking an advance can further enhance your credit rating. So, in the future, if you want a substantial loan on more favourable terms, potential lenders will look at your credit file to make a lending decision.

7: Works alongside other funding streams

If you already have fixed-term loans with a bank or you’ve accessed other credit facilities, but you find you need more credit for the business, then the payment advance can be an excellent addition.

You could regard it as a line of credit that sits alongside other funding options. Or, if it’s the only loan you have and another lender sees you’ve managed the facility correctly, it could work in your favour when applying for other loans.

Is a merchant cash advance right for your business?

Depending on your business’s circumstances, a merchant cash advance can be an ideal solution if you’re looking for a quick injection of cash. The merchant doesn’t specify how to use the cash advance; smoothing over cash flow issues or buying assets are examples of how you can put the lump sum to clever use.

Because it’s linked to your volume of transactions, in theory, the loan matches your performance. If you’re a retail business, you’re probably conducting most of your sales through your terminal already as consumers move towards cashless payments. So, in some ways, getting the loan from one of your primary business partners makes sense.

How much will the card processor advance your business?

The lender typically looks at your monthly turnover through your terminal when deciding an advance for your business. 1-2 times your monthly sales through the card terminal is as high as most will consider, although some card processors go higher.

Naturally, you need to match your application with what’s affordable; you don’t want to see too much taken out of each transaction and see your profits get hit too hard. You want the advance to have a positive impact on your business.

Will your business qualify for a merchant cash advance?

As previously mentioned, you might discover that getting accepted for a merchant cash advance is a straightforward process if you’re already a merchant who is busy processing payments through your terminal.

If traditional sources of loans have rejected your application, you might discover that the card processor approves your merchant advance. However, acceptance depends on some aspects we’ve covered above; time in business, credit score and the amount requested could be the critical criteria.

The lender might conduct what’s termed a soft credit check on you if you’re a new business and sole trader. If you have adverse credit information registered at your home address, you might still get accepted for a merchant cash advance.

How can Funding Options help?

Funding Options has been chosen by the government-owned British Business Bank as a designated platform to find finance for businesses.

Even if your credit history is less-than-perfect, you might be able to access business finance through one of the 120+ lenders we work with. 

Whatever your circumstances, let's get started with your application and see what you could be eligible for today.