What is a Merchant Cash Advance and How Does It Work?

Customer using credit card for payment by NFC technology to owner at restaurant.

TL;DR

  • A merchant cash advance is a type of funding where a lender advances money to a business in exchange for a percentage of future sales.
  • The repayment of a merchant cash advance is made through daily or weekly withdrawals from the business’s bank account.
  • Merchant cash advances offer several benefits, including ease of qualification and speedy funding.
  • Eligibility for a merchant cash advance is based on the business’s sales volume and credit card processing history.
  • Merchant cash advances can be used for various business expenses, such as purchasing inventory or equipment, marketing campaigns, or hiring employees.
  • If a business is unable to repay a merchant cash advance, they may face default and damage to their credit score.
  • Alternatives to a merchant cash advance include business loans, lines of credit, and crowdfunding.
  • Choosing the right merchant cash advance company involves considering factors such as fees, repayment terms, and customer reviews.

What is a Merchant Cash Advance?

As a small business owner, you may have heard of a merchant cash advance (MCA) as a potential funding option.

A merchant cash advance is a type of financing in which a lender provides you with a lump sum of money upfront in exchange for a percentage of your future sales. Merchant cash advances are typically used by businesses that require immediate cash flow, such as those with seasonal fluctuations or businesses that need to make sudden purchases or invest in marketing campaigns.

Although merchant cash advances can be a quick and easy way to access funding, they can also come with high fees and repayment terms.

How Does a Merchant Cash Advance Work?

When you apply for a merchant cash advance, the lender will review your business’s sales volume and credit card processing history to determine your eligibility. Once approved, you will typically receive the funds within a few days.

Repayment of a merchant cash advance is made through daily or weekly withdrawals from your business’s bank account, known as a percentage of sales agreement. This means that a portion of your daily sales will be automatically withdrawn until the advance is fully repaid.

It’s important to note that while merchant cash advances can offer quick and easy access to funding, they often come with high fees and interest rates. As such, it’s essential to carefully consider whether a merchant cash advance is the right financing option for your business.

Benefits of a Merchant Cash Advance

Despite the potential drawbacks, merchant cash advances offer several benefits to small business owners, including:

  • Ease of qualification: Unlike traditional loans, merchant cash advances are based on your business’s sales volume and credit card processing history, rather than your credit score.
  • Fast funding: Merchant cash advances can be funded within a few days of approval, making them an ideal option for businesses in need of immediate cash flow.
  • No collateral required: Merchant cash advances are unsecured, meaning you don’t have to put up collateral such as property or equipment to secure the financing.

Qualifying for a Merchant Cash Advance

To qualify for a merchant cash advance, your business typically needs to meet the following requirements:

  • Has been operating for at least six months
  • Processes a minimum of £5,000 in credit card sales per month
  • Has a credit score of at least 500

Keep in mind that each lender will likely have their own eligibility requirements, so it’s essential to review the terms carefully before applying.

What Can a Merchant Cash Advance Be Used For?

If we’re asking ourselves “What is a Merchant Cash Advance?”, it’s important we also look at what merchant cash advances can be used for. 

Essentially they can be used for a variety of small business expenses, including:

  • Purchasing inventory or equipment
  • Hiring employees
  • Investing in marketing campaigns
  • Covering unexpected expenses or emergencies
  • Expanding your business

It’s essential to use the funds responsibly and only for necessary business expenses, as failure to repay the advance can result in default and damage to your credit score.

Repayment of a Merchant Cash Advance

As mentioned earlier, repayment of a merchant cash advance is made through daily or weekly withdrawals from your business’s bank account. The amount withdrawn is typically a set percentage of your daily sales until the advance is fully repaid.

It’s important to understand the repayment terms before accepting a merchant cash advance, as failure to make payments can result in default and damage to your credit score.

Alternatives to a Merchant Cash Advance

While merchant cash advances can be a quick and easy way to access funding, they can also come with high fees and interest rates. As such, it’s important to consider alternatives, including:

  • Traditional business loans: Business loans typically offer longer repayment terms and lower interest rates than merchant cash advances. However, they may be more difficult to qualify for and require collateral.
  • Lines of credit: Business lines of credit offer flexible funding options and typically offer lower interest rates than merchant cash advances. However, they may be more difficult to qualify for and often require a strong credit score.
  • Crowdfunding: Crowdfunding platforms can be an excellent way to access funding without incurring debt. However, they typically require a significant amount of effort to market and promote your campaign successfully.

Choosing the Right Merchant Cash Advance Company

If you decide that a merchant cash advance is the right financing option for your business, it’s essential to choose the right lender. Consider the following factors when selecting a merchant cash advance company:

  • Fees: Look for a lender with transparent and reasonable fees.
  • Repayment terms: Review the repayment terms carefully and ensure that they are feasible for your business.
  • Customer reviews: Check online reviews and testimonials from other businesses to ensure that the lender has a good reputation.
  • Support: Choose a lender that offers responsive and helpful customer support.

Conclusion

Merchant cash advances can be an excellent option for small business owners in need of immediate cash flow. However, they come with high fees and repayment terms, so it’s essential to carefully consider whether they are the right financing option for your business.

If you decide to pursue a merchant cash advance, be sure to review the terms carefully and choose a reputable lender that offers transparent fees and responsive customer support.

Frequently Asked Questions

What is the difference between a Merchant Cash Advance and a Business Loan?

Merchant cash advances are based on your business’s sales volume and credit card processing history, while business loans are typically based on your credit score and require collateral. Merchant cash advances also come with higher fees and interest rates than traditional business loans.

How long does it take to receive funds from a Merchant Cash Advance?

Merchant cash advances can typically be funded within a few days of approval, making them an ideal option for businesses in need of immediate cash flow.

Is a Merchant Cash Advance a good option for startup businesses?

Merchant cash advances may not be the best option for startup businesses, as they typically require a minimum of six months of operation and a minimum of £5,000 in credit card sales per month. However, each lender may have their own eligibility requirements, so it’s essential to review the terms carefully before applying.

Will You Qualify For A For Kredit Loan?

There are four main criteria for qualifying for a For Kredit loan.

If you can answer yes to all of these, then you have a good chance of being approved.

You're a UK citizen

You’ll also need the relevant documentation to prove this – a passport or a birth certificate are fine.

You’re a limited company or a partnership

Your business must be at least 6 months old to be accepted.

You can provide bank statements from the last year

We can accept applications from all businesses (no matter the age or industry)

You're at least 18

You can’t apply for a loan if you’re below this age.

A Simple Application Process

  • Apply online in 5 minutes

    Decide how much money you need to borrow and and fill the online application with all your details.

  • Approval in just 24 hours

    Once your business loan has been authorized, you have the flexibility to transfer the required amount to your bank account. The funds are expected to be deposited into your account within just a few hours.

  • Borrow up to 2 years

    How you pay back your business loan depends on your situation. If you want to pay it back early, there won't be an extra fee.

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