Business Cash Advances Explained

By Gary Hemming, ABC Finance

Business cash advances continue to grow in popularity, but they can appear confusing to those who have never taken one before.

The reality is that this product can be quite simple, so in this guide, we will break down merchant cash advances, including what they are, how they work and their pros and cons.

What is a merchant cash advance?

Merchant cash advances, also known as a business cash advance is a type of short-term, unsecured borrowing. They are available to business owners who take a healthy amount of money each month using their PDQ card terminal machine.

 How do merchant cash advances work?

Like a traditional business loan, a business cash advance is designed to release cash to your business, with regular repayments made to repay the debt. The funds are an advance of your card takings, essentially allowing you to borrow against your future card takings.

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The advance is then repaid automatically, as a pre-agreed percentage of your card takings are sent automatically to the lender.

Unlike traditional business loans, there is no set interest rate for the borrowing, instead, you repay an agreed repayment figure. This means that no matter how quickly you repay your advance, you will still pay back the same amount.

How are the costs calculated?

As there is no interest rate to work from, you must focus on the ‘factor rate’. This gives you the percentage that you will repay when you take your cash advance.

As an example, for a business cash advance of £10,000, with a factor rate of 1.2, you would repay £12,000 – £1.20 for every pound borrowed.

Assuming the advance is to be repaid over exactly 12 months, this gives you an effective interest rate of 20%. This can be deceiving though as if it was repaid over 6 months, the effective rate rises to the equivalent of 40% per annum.

The benefits of taking out a merchant cash advance?

There are a number of benefits of taking a business cash advance, such as:

  • The funds released into your business can, if used well, be used to take your business to the next level of growth.
  • Funds can be released very quickly, often in as little as 24 hours from full application, meaning they can be perfect for covering unexpected emergencies.
  • The payments are taken automatically each day, meaning there is no risk of missing payments.
  • During your quieter spells, you will be repaying less, making them easier to manage than would be the case when borrowing using a traditional business loan.
  • Business cash advances have a very high acceptance rate and you may still be eligible for borrowing, even if you’ve previously suffered adverse credit.

And the drawbacks

Although there are numerous benefits, there can also be drawbacks:

  • By agreeing to repay a percentage of your card takings until the advance is repaid, you will, of course,suffer slightly reduced cash flow, as with any loan repayment.
  • Business loans can often be repaid over longer terms, which will generally mean lower monthly costs.

What are the alternatives?

When considering raising finance for your business, your main alternatives to a merchant cash advance are:

  • Unsecured business loans
  • Business revolving credit facilities, and
  • Overdrafts

It is always worth comparing different products before taking out borrowing for your business, as there can be, significant differences in cost between different products.

Generally speaking, a business cash advance will have the simplest and fastest application process of all of the above products.

Would I be eligible for a business cash advance?

As mentioned above, the application process is very straightforward. In addition, lenders tend to have flexible criteria and may be less strict than they are with other forms of unsecured lending.

This is because the repayments are made directly through the borrowing companies card terminal. This removes the risk of default through poor financial management, as long as the card payments continue to be received.

Generally speaking, you could qualify for a merchant cash advance if you have been trading for over 6 months and are taking a minimum of £5,000 per month through your card terminal.

Would a business cash advance be right for me?

If you’re looking to raise finance for your business quickly and feel that the repayments moving in-line with your card takings is useful, this type of loan is a good option. and are taking over £5,000 per month through your card terminal you could qualify.

If you feel you may not qualify for, or can’t wait for a business loan, then the chances are high that a business cash advance will be the best option for you.

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