Understanding Merchant Cash Advances: A Comprehensive Guide for UK Businesses

Guide to Merchant Cash Advances in the UK

Welcome to our Guide to Merchant Cash Advances in the UK.

Navigating the financial landscape can be challenging for UK businesses, especially when exploring alternative funding options. One such option is a Merchant Cash Advance (MCA) also known as a Merchant Loan Advance or Business Cash Advance. In this comprehensive guide, we aim to shed light on MCAs, helping you understand if this financial solution aligns with your business needs.

What is a Merchant Cash Advance?

A Merchant Cash Advance is a form of business financing where a company receives a lump sum amount in exchange for a percentage of future credit card sales. Unlike traditional loans, MCAs don’t have fixed repayment schedules, making them a flexible option for businesses with fluctuating revenues.

How Does an MCA Work?

Merchant Cash Advances are unique in their repayment structure. Interest is fixed and added to the amount borrowed. A business then agrees to repay the advance through a fixed percentage of daily or weekly credit card sales. This means during peak sales, repayments are higher, and during slower periods, they are lower, providing cash flow flexibility. And as the interest is fixed at the start there is no penalty if it takes longer to pay it back.

Pros and Cons of MCAs

Pros:

  • Quick Access to Funds: MCAs offer fast access to capital, often within days.
  • No Collateral Required: Businesses don’t need to provide assets as security.
  • Flexible Repayments: Repayments align with your sales, aiding cash flow management.


Cons:

  • Higher Costs: Merchant Cash Advances can be more expensive compared to traditional financing.
  • Impact on Cash Flow: Daily or weekly deductions might strain cash flow during slow periods.
  • Not Suitable for All: Businesses without consistent card sales might find MCAs challenging.

How Much Can Your Business Borrow with an MCA?

Wondering how much you can borrow? Well, it’s all about your average monthly card takings. The more your business earns through card transactions, the higher the amount you can borrow. For instance, if your business averages £5,000 in sales per month, you could qualify for a similar amount. Sometimes, depending on risk analysis, you might even receive up to 120% of your monthly card turnover. The general range is between £2,500 and £300,000, but we’ve seen cases where businesses secured even more.

Duration of Borrowing: How Long Can It Last?

Merchant Cash Advances (MCAs) are short-term funding solutions. The repayment period is influenced by your business’s card payment performance. When sales are booming, you pay back faster, and during slower times, you pay back less. Typically, repayments span 6 to 9 months but can be as short as 4 months or extend up to 18 months. Positive repayment history? You might just qualify for a top-up and an extended term.

Qualifying for an MCA: What Does It Take?

To be eligible, your business, whether a limited company, partnership, or sole trader, must be based in the UK and accept card payments. Various industries, from hospitality and retail to online e-commerce, can benefit from this type of finance. Ideally, a trading history of approximately four months and a monthly card sale of more than £2,500 are preferred. You must also take a minimum of 10 transactions a month. If you don’t meet these then it would be worth speaking to an expert or exploring other options.

Costs Involved: What Will It Set You Back?

Every business is unique, and so is the cost of an MCA. The cost is calculated using a factor rate, giving you a total repayment figure. There are no hidden charges; you simply pay back a percentage of your future card sales until the advance is fully repaid. For example if a customer wanted to borrow £10,000 and based on their business had an advance fee of £2500, the total repayable would be £12500. This total would not be affected by how long it took to repay.

Factor Rate: What Is It and How Is It Calculated?

A factor rate is used to determine the total repayment value. It’s a simple calculation where the amount of funding required is multiplied by the factor rate figure, usually between 1.1 and 1.5. For example, if your business borrows £5,000 and the factor rate is 1.25, you’ll repay £6,250 in total. The rate is determined by your business’s trading performance, sector, and associated risks.

Fixed Monthly Repayments: Are There Any?

Nope, there are no fixed monthly repayments. MCAs are not traditional loans, so there’s no fixed term and no APR. Repayments are a small percentage of your future card sales, accommodating the fluctuating nature of business.

Credit Rating and Bad Credit: Will It Affect Your Application?

While the application process doesn’t involve credit checks, the provider you’re matched with might perform one. A missed or late payment can affect your credit score. But here’s the good news – having a poor credit history shouldn’t deter you from applying. Lenders often consider applications with bad credit, especially if you’re upfront about any credit issues.

Merchant Cash Advance vs Business Cash Advance: Is There a Difference?

No difference here! They are two terms for the same product, offering identical funding options.

Online Payments: Can They Be Processed?

Absolutely! Whether you’re using standard PDQ merchant terminals or online payment gateways like Stripe, Paypal, or Shopify Payments, you can apply for a cash advance.

Why No APR?

Merchant Cash Advances are not traditional loans, so there’s no fixed term and no APR. The fees are measured as a factor rate, and you repay a percentage of your future card sales, adjusting to your business’s pace.

Comparing Providers: Why Should You?

Each lender might offer slight variations based on numerous factors, such as overall repayment values and daily sales percentages. Comparing quotes from lenders helps you make the right choice for your business.

Regulation: Are MCAs Regulated by the FCA?

Currently, MCAs are not regulated by the FCA (Financial Conduct Authority) in the UK. However, some lenders offering MCAs might provide other forms of funding which are regulated. It’s always good practice to check with your lender about the regulation status of the product.

Is an MCA Right for Your Business?

MCAs can be a lifeline for businesses needing quick capital without the constraints of traditional loans. However, they are not a one-size-fits-all solution. It’s crucial for businesses to assess their sales patterns, financial health, and the cost of the advance to determine if an MCA is the right fit.

Conclusion

Merchant Cash Advances offer a unique and flexible financing option for UK businesses. While they provide quick access to funds without the need for collateral, it’s essential to weigh the pros and cons. Understanding your business needs and thoroughly researching MCAs will help you make an informed decision.

Further Questions?

If you have more questions or need personalised advice, don’t hesitate to reach out to financial experts or consult reputable sources. Knowledge is power, and making informed decisions is key to your business’s financial success.

Closing:

This blog post aims to be an informative and unbiased guide to Merchant Cash Advances in the UK, providing clarity and insights to help businesses make informed decisions. If you found this guide helpful, feel free to explore our other resources and articles on business finance.

Other Resources:

🟢 Best Card Machine Readers in the UK

🟢 Small Business Funding Options

🟢 Short Term Invoice Financing

About the author 

Stuart Mckee

I've been providing business and schools with diverse funding solutions for over 20 years across sectors such as Energy, LED, Vehicles, Equipment, Tax, Education and so much more. My goal is to help find the right solution for each unique business and school. I hope you enjoy these articles which are designed help guide you to make informed decisions for your business. To your success.

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