Merchant Cash Advance
A Merchant Cash Advance could be a fast, flexible way for your business to borrow money.
Merchant Cash Advance Guide
What Is A Merchant Cash Advance?
A Merchant Cash Advance is a short term cash injection for your business. It is unsecured and is repaid through your businesses future credit and debit card sales. It’s also known as a Business Cash Advance or PDQ Loan.
These are different to traditional Unsecured Business Loans as you don’t have to make monthly payments. Instead, a percentage of the money you owe is repaid every time you process a transaction on your card machine. So the more transactions you make, the faster your loan is paid off.
You don’t have to use any of your assets, this is not a Secured Business Loan, it’s unsecured debt. The finance is loaned against future debit and credit card sales your business makes. This makes it open to any U.K. business with a merchant account that processes payments through a card PDQ machine or other merchant gateway.
How Does It Work?
The Merchant Cash Advance funder will lend up to 100% of the monthly revenue you take from cards. Each month an agreed amount, typically 10%, will be taken to pay back the loan.
From transactions through your merchant card machine, you would receive 90% into your business bank account and the remaining 10% would go to the lender. For every £100 you take, you keep £90 and £10 goes to the funder to pay off the loan.
The interest element in a normal loan is different with Merchant Cash Advance loans. Instead, lenders use what ia called a factor rate.
What Is A Factor Rate?
It is a decimal figure used to calculate how much the Merchant Cash Advance will cost you. For example, if you borrowed £5,000 at a factor rate of 1.2%, the total you would pay back would be £6,000.
The calculation is simply £5,000 x 1.2 to get to £6,000.
Funders will vary the factor rate depending on their assessment of your business, industry and risk. Typical variations are between 1.1 – 1.5.
For Example, if you borrowed £10,000 at a factor rate of 1.2%, the total you’d have to pay back would be £12,000. If you took £10,000 a month in card sales and wanted to repay at a rate of 10% it would equate to a daily repayment of £33.33 and would take around 360 days.
There is a no fixed term and, depending on sales through the card machine or merchant gateway, the loan could be paid off quicker, or longer than expected. You are only making repayments to the funder as you take payments from your customers.
Is A Merchant Cash Advance Classed As A Loan?
While you are borrowing money, it’s not a loan in the traditional sense, even though some people do refer to them as PDQ loans or card machine loans.
Really, you are selling expected future card sales revenue to the lender. It’s common for this sort of loan to not need a credit check and they can be arranged more quickly than a standard Unsecured Business Loan.
How Much Will I Be Able To Borrow?
The quick answer is, the more your business processes through the card machine, the more you will be able to borrow.
Most lenders will lend from £2,500 up to £300,000 depending on the level of transactions going through the merchant machines.
What Are The Advantages?
There are several advantages in taking out this kind of loan:
Borrow from £2,500 up to £300,000 – Your business will be eligible for merchant advances in-line with your monthly card turnover. Normally up to 100% but sometimes as high as 150% of card sales.
Repay as you make sales – All businesses have ups and downs in turn over. It can be for a variety of reasons, some out of your control. Seasonality, the general economy and just the great British weather can impact your business.
With a Merchant Cash Advance, you only repay in-line with your sales. The advantage here is, if you have a low sales month, your payment will come down with it, unlike a standard loan where you’d still have to make the agreed monthly payment. This can take some pressure off you and your business when you need it most.
No fixed term – You will know from the start how much the loan will cost you and it will be paid back at an agreed percentage of card turnover each month. Ordinarily, with a standard loan you would have, say 3 years to clear a loan. With Merchant Cash Advances, the term will be determined by your card volume and the percentage you’ve agreed with the funder.
Lower risk repayments – With a Secured Business Loan or Unsecured Business Loan, you will be committed to a monthly repayment amount, regardless of how you traded that month. This can put pressure on the business and can lead to defaulting. Here, the payments are taken automatically and in line with turnover so you won’t be over extended.
Easy application process – Some of our panel of funders can use your merchant ID to see the level of business and agree the amount you can borrow. This is quicker than relying on sending statements on an email or in the post.
Credit rating is not as important – As the funder is taking payments directly from your sales, your credit rating is not as large a factor as it is for other types of business finance.
Fast decisions – You can expect quick approvals and you can potentially have the money in your account within a few days.
No need to make a business plan – Whereas business loan funders want to see business plans, there is no need with Merchant Cash Advances. The lending decision comes from looking at your previous sales which let the funders make predictions on future performance.
It’s unsecured – The loans are not secured on any of your business assets which many borrowers prefer and, means those without assets have a route to borrow money.
Are There Disadvantages?
The main disadvantage with a Merchant Cash Advance product is that not all businesses will qualify.
They aren’t for businesses who deal mainly in cash or other forms of payment.
It won’t be available for businesses who have been in business for under 3 months
If your business does process card payments through a merchant terminal, you will need to have a certain amount of turnover as a minimum, typically £2,500 a month. If you don’t meet this requirement you will need to consider ways to boost the amount you process on cards or look at alternative ways to raise the finance you need.
Another slight disadvantage is some lenders will insist that you move your business from your existing merchant provider to their preferred provider. This isn’t as common as it once was but on the plus side, it will be managed as part of the application process.
Does My Business Qualify For A Merchant Cash Advance?
There are some basic requirements to be eligible for a business cash advance:
Have a merchant account and take card payments
Be a sole trader, Limited Company or partnership
Take at least £2,500 from card payments, per month
Have at least 3 months trading history
You may find your business falls outside these requirements but with other forms of business finance available, you may find an alternative way to raise the business finance you need.
What Can You Do To Qualify For A Merchant Cash Advance?
Whilst you might not meet the above criteria today, it may well be something that is achievable in time. If you’ve not been trading long enough, it’s obvious that waiting and trying again after 3 months has passed would be a good idea.
If you don’t meet the minimum monthly turn over through your merchant account, there could be ways you could increase it with your current levels of business.
You could encourage customers to pay by card, rather than cash. By increasing your monthly card payment turnover you can, not only increase your chances of being accepted but you can also potentially borrow a higher amount to help grow your business.
What Can I Use A Merchant Cash Advance For?
As with certain other forms of business finance, you can use your Merchant Cash Advance for any legal reason. For example:
Training or hiring new staff – As your business grows or you move into seasonal demand, it may be necessary to increase the amount of people working for you. You might want to train existing staff in new techniques or products and services your business provides. A Merchant Cash Advance can be used here and is helpful as it is quick to put in place and easier to get than a traditional bank loan, so you can get access to capital when you need it.
Buying stock – Some businesses will use PDQ loans to help buy new stock, perhaps to fulfil a large order. Having access to capital quickly and easily can be a real boon. If your cash flow has been interrupted for some reason, being able to get cash when you need it is important. Whether you need to buy in new stock to keep levels up or increase your product lines, you can move quickly with a Merchant Cash Advance.
Advertising and marketing – To keep your business in the mind of your existing customers and potential new clients, advertising and marketing is a must. Using a Merchant Cash Advance can be a fast,effective way to get capital when needed to help your business expand.
Help cashflow – Cash is king and not having enough can be fatal for any business. A Merchant Cash Advance could be a timely lifeline during periods where you have had lower sales volume. The repayments are taken directly from sales, so if your turnover goes down, so will your repayment.
Improving business premises – All businesses want to create the right impression and the building you work from can be part of that. You can use a Merchant Cash Advance to fund improvements to your business premises by making it look better inside or making it larger, allowing your business to grow.
Buy new equipment – To make sure your business is operating as efficiently as possible, or providing the services your customers need, it might be necessary to invest in new equipment. Instead of standard asset finance you could use a Merchant Cash Advance to buy what you need.
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