Table of Contents:
- What Is A Merchant Cash Advance?
- How Does It Work?
- Will It Work For Your Business?
- Is It A Good Option For Small Businesses?
- What's The Cost?
- How Do You Make Repayments?
- Why Choose MCA Over Traditional Business Loans?
- How Do You Qualify?
- How Do You Apply?
Alternative business funding is fast becoming the most popular option amongst small businesses, but with so many options out there, which one should you choose? A merchant cash advance, or a business cash advance as it is also known, could provide your business with the capital it needs to survive, thrive and out-rival key competitors. Why?
- It's fast and easy to obtain
- You only repay when you sell
- Everything is agreed upfront, so there are no hidden fees
There are so many advantages that come with this type of lending. That said, you should still do your research before deciding on the best lending option for you and your business. Never enter into a loan agreement blindly. Choose the wrong type of lending and your business will suffer. Choose the right type of lending and your business will prosper.
But where do you start? As a busy business owner your time is precious. You haven't got loads of spare time to be trawling through the internet searching for answers. You need both the cash and the information quickly, so here's everything you need to know about merchant cash advances (MCA).
What Is A Merchant Cash Advance?
A merchant cash advance is an innovative business loan alternative. It operates on a business-to-business basis and offers quick access to capital ranging from £2,500-£300,000. It is a relatively new funding option, but the demand for it is increasing greatly amongst the UK's SMEs - and for good reason! Don’t just take our word for it - the benefits of alternative lending are also recognised by world-renowned, financial media institution Forbes. Read their take on everything MCA here.
How Does It Work?
Put simply, a lender supplies you with a lump-sum cash-injection in return for a pre-agreed percentage of your future card sales. You are basically selling a proportion of your future earnings in exchange for instant access to funding. The amount of capital you receive will depend on the volume of card transactions you have made in previous months. If you have a good volume of credit card sales, but a shortage of spare capital, an advance could be a great means of acquiring the extra funds you need to boost your business.
Your terminal provider will allow the lender instant access to your card receipts, so that they can assess how much revenue you are making through your card machine. This information helps the lender to make a fast and fair decision on two things:
How much capital they are willing to lend you
How quickly they believe you'd be able to repay the loan amount
The quick and simple assessment process allows lenders to make decisions within days, or even hours, of when you first apply. This gives you access to funding far faster than a traditional bank loan.
The next step is for the lender to put their decision to you. It is now that you are given the opportunity to ask any questions which you might have. Do make use of this opportunity - discuss all of the terms, the repayment plan and the fees before finalising an agreement. Once you're happy with everything, the lender will go ahead and deposit the loan amount into your account. There you have it, instant access to capital for all your business' needs!
Will MCA Work For Your Business?
An advance should not be considered a long-term financial solution. It is instead there to provide short-term financial relief - short being the keyword. If used in this way, this type of lending can be extremely useful. It provides fast access to working business capital and short-term repayment plans. Most businesses are able to pay back advances in as little as 4-8 months, but repayment periods can span up to 18 months if necessary.
Is It A Good Option For Small Businesses?
Short repayment terms could be a real plus-point if you're a start-up or a small business. You are most likely looking to avoid the long-term financial stresses that come hand-in-hand with traditional financing methods (bank loans and credit cards). MCA is a good match for your business if:
- You need access to cash fast.
- You need the money to fill a short-term hole in funds (to repair broken equipment/bridge a gap in slow sale periods/expansion or relocation etc.)
- You want to pay back the amount as quickly and comfortably as possible.
Situations When MCA Helps Small Businesses:
|Business:||Scenario:||With A Merchant Cash Advance You Can:|
|Retail/Shop||Your business is doing well, but you need to take on additional staff to keep up with the demand. You have limited assets, so you can’t afford to do this without help.||Expand your work-force and serve more customers at a quicker rate. This leads to an immediate increase in revenue. Your business is not only surviving, it’s thriving!|
|Restaurant/Cafe||It's the busiest month of the year and your oven breaks. You don’t have any spare cash and you can’t afford to replace it. With nowhere to cook the food, how is your business supposed to operate?||Replace the oven fast and get back to business straight away. Your business successfully survives the unexpected cost and continues to grow because of it.|
|Salon||A new competitor opens nearby. You’re worried that you might lose business to them and you’re feeling the pressure to update your salon as soon as possible.||Renovate the salon's interior and buy new equipment. You have a surge in appointments and your business starts to generate more revenue than ever before. You continue to out-rival competitors.|
|Hotel/B&B||The weather hasn't been great and you've had a slow month because of it. You know that the weather will soon turn warmer, but how do you keep up with costs until then?||Access the funds you need to get through a tough season. Financial strain is reduced and you can focus on the busy season ahead to ensure it is the most profitable yet.|
What's The Cost Of A Merchant Cash Advance?
You always decide on the repayment percentage with the lender before any funding is exchanged. This percentage is then deducted in daily or weekly installments from the total revenue made from card sales in that period.
Repayments continue until you have repaid the amount borrowed, plus a fee. Most lenders will charge a fee of between 20-40% of the original loan amount.
The best thing about repaying in percentages instead of fixed figures is that repayments are flexible and sensitive to your businesses' performance. The amount in which you repay will always be relative to your business' earnings. If your business is having a slower day and makes less money, you will also repay less. Better still, on a good business day, you can repay more and pay off the loan amount even quicker than you originally thought. This all helps to minimise financial strain.
An Example of Repayments In Action:
Let's say you agree to give the lender access to 10% of all your future card sales until the loan amount is repaid. If you make £1,000 in card payments in a day, the lender will withhold 10% of that (£100) and you will receive the rest (£900). If you only make £10 one day, you don't need to worry. The lender will still take 10% (£1) and you'll keep the remainder (£9).
How Do You Make Repayments?
In most cases, the lender will work directly with your terminal provider to make repayments as simple and hassle-free as possible. The card provider will routinely withhold the pre-agreed percentage from your total card sales and transfer it to the lender. This way you don't have the headache of setting up a direct debit.
The best way to think of it is like income tax - deductions are made automatically by a third party before you receive revenue. You spend less time worrying about repayments and have more time to concentrate on your business.
What Happens If You Default On Repayments?
Firstly, remember that this type of business funding is designed to be manageable and flexible. The repayments for cash advances are intentionally structured so that you don’t find yourself unable to make repayments. If you do find yourself unable to repay, don't panic! Many lenders are open to discussion and will restructure repayments to help you keep up.
It is obviously preferable for both yourself and the lender that you do not default on repayments. Non-payment could lead to additional charges and that's when things start getting expensive. All lenders will have different policies and rates on this, so it is advisable that you always ask lots of questions before settling a loan agreement. Again, do your research!
Why Choose MCA Over Traditional Business Loans?
When it comes to lending in 2018, the old way isn’t always the best way. Bank loans aren't for everyone. Perhaps you don't qualify? Do you have bad credit? Maybe you don’t have the time to wait for a bank loan to be processed and you need the cash as quickly as possible. Merchant cash advances solve these problems and offer small businesses a better alternative:
- Applications can be made quickly by filling out an online form. There's no need to visit a bank.
- You don't need to provide masses of supporting documentation, or complete and sign lots of paperwork.
- It's easy to qualify. You don't need a perfect credit-rating to access the cash your business needs.
- The approval rate is far higher with MCA than small business applications for bank loans.
- You can get access to cash a lot faster. Cash advances are deposited into your account in as little as 24-48 hours from the point of application.
- You can borrow small amounts. Most banks only offer large loan amounts. If you have a small cost to cover, a large bank loan will burden you with unnecessary debt.
- There's no collateral with this type of lending, so there's no personal obligation.
- Unlike a bank loan, there are no fixed repayment periods, so you don't have to worry about meeting financial deadlines.
- There are no late fees. Payments are deducted from your card sales automatically, making it nearly impossible for you to default.
How Do You Qualify For A Merchant Cash Advance?
The criteria to qualify for an advance is simple. It's far less intrusive and stringent than the qualifying conditions for a bank loan. Most lenders aren't concerned with your personal credit history. They only require that you are making a good volume of card sales each month. Do remember that different lenders will have slightly different criteria, but overall the conditions are as below:
You need a working card machine
Your business must be based in the UK
You need to have been in business for a minimum of 3 months (some lenders prefer 6-12 months).
You need to consistently make a good revenue from your card sales each month (£2,000-£3,500 a month is the typical expectation).
What Could Prevent You From Qualifying?
One of the best things about this type of alternative lending is that the approval rate is very high. Providing that you achieve a good volume of card sales each month, the likely-hood that you wouldn't qualify for an advance is slim. There are a couple of things which some lenders might find off-putting, such as:
If you have previously filed for bankruptcy in the past
If you've only been in business a matter of weeks (lenders cannot be confident that you are able to keep up with repayments)
If you are unable to prove how many card sales you are achieving (the lender will not be able to assess how much revenue you are making)
How Do You Apply?
Applying for an immediate cash advance is so much easier than applying for a business loan from a bank. Unlike bank loans, you don't have to attend meetings to discuss the lending or provide masses of supporting documentation. You can apply online from the comfort of your own home. All you need to do is submit one short form. It takes no time at all! There are no obligations and you'll only have a small wait to find out if you've been accepted.
Alternatively, if you want to know more about MCA, you can read the 7 Pros of Merchant Cash Advance Loans.