Every business goes through periods where cash flow is stretched due to reduced sales, unexpected bills, or external factors. It’s how you manage cash flow gaps that ensures the long term profitability of the business. According to the Australian Securities & Investments Commission, inadequate cash flow is the cause of failure for 51.2% of insolvent companies.

Many businesses seek external funding to help them manage cash flow gaps. Merchant cash advances are a finance option for companies seeking a fast cash flow boost without taking on long-term debt or using property and business assets as collateral.

What Is a Merchant Cash Advance?

A merchant cash advance is a finance solution that enables a business to access immediate funding and pay back the sum owed through a percentage of future card payment revenue. The borrower receives a lump sum as an advance on future card payments. A factoring fee is added to the total amount the borrower needs to repay.

The repayments of a merchant cash advance are based on future sales revenue. The lender pays a percentage of sales revenue deducted from each payment received on the borrower’s card terminal. A traditional business loan involves regular payments to the lender to repay the principal and interest and has an extended and complex approval process. In contrast, a merchant cash advance is a flexible and fast way to improve cash flow.

How Do Merchant Cash Advances work?

A merchant cash advance provider will review up to six months of your card processing statements to determine the amount you can borrow. You can receive an advance of up to 70% of the average monthly card sales revenue. Because the lender doesn’t need to adhere to strict lending criteria, they can approve funding much faster than a traditional loan provider or bank.

The advance and factoring fee are repaid automatically when your business receives a card payment. When a customer pays via card, a percentage of the payment is paid directly to the lender. You repay the advance every day that you process customer payments on your card terminals.

How Much Does a Merchant Cash Advance Cost?

The cost of a merchant cash advance is agreed upfront and doesn’t accrue interest like a traditional business loan. The advance and factoring fee are repaid as your business processes card payments.

Merchant cash advance terms can vary according to the amount borrowed. A short-term advance can be repaid over a period of 90 days. Once the advance has been processed and you have received funding, the repayment terms begin.

The cost of a merchant cash advance is determined by the factor rate and can range from 1.1 to 1.5. For example, a merchant cash advance of $20,000 with a factor rate of 1.4 would result in a final repayment of $28,000.

Do Merchant Cash Advances Impact Your Credit Rating?

While merchant cash advance providers are much more flexible and willing to lend than traditional loan providers, they will still perform a credit check before approving an application for an advance. However, this “soft” check will not usually impact your credit score.

Which Types of Businesses Can Use a Merchant Cash Advance?

A merchant cash advance is a finance solution suitable for businesses that process a high volume of card payments, including brick and mortar stores and e-commerce businesses. Any company that processes a large number of sales by card can benefit from a merchant cash advance.

Pros and Cons of a Merchant Cash Advance

The flexibility and fast access to funding make merchant cash advances appealing to many businesses. But they do have disadvantages, and your business may be better suited to an alternative finance solution. To help you decide whether this type of finance is right for you, let’s assess the advantages and disadvantages of a merchant cash advance.

Pro – Fast Access to Funds

You can receive cash in your account within a little as 24 hours of being approved for an advance. A traditional loan provider will assess multiple aspects of your business and want to know the reason why you are seeking finance. A merchant cash advance lender is interested in your ability to repay the amount borrowed and whether the type of funding is the best option for your business.

They will ask you to submit your card payment statements and usually make a decision to approve funding within hours. Merchant cash advances are one of the fastest types of business finance.

Pro – High Approval Rate

Traditional loan providers are risk-averse and require businesses to meet strict criteria to qualify for finance. A merchant cash advance is much more flexible and accessible to companies with a shorter trading history or lower credit rating.

Pro – No Fixed Monthly Repayments

The advance is repaid using a percentage of your monthly card payments revenue. There are no fixed monthly installments.

If you have a slow sales month, the amount you repay is reduced. If you have a month with a high sales volume, the amount you repay will increase. By adjusting in line with your turnover, you don’t need to worry about how repayments will impact your cash flow.

Pro – No Need to Use Property as Collateral

While a traditional lender will usually require you to use your property to secure funding, you don’t need to use your home or business assets as collateral to secure a merchant cash advance. Using your property to secure finance can significantly impact the amount of capital you can access. A merchant cash advance enables you to use your business’s future card payments to secure funding.

Pro – Clear and Upfront Repayment Amount

The total cost of a merchant cash advance includes the advance amount and the factoring fee. There are no interest payments. You know exactly how much you owe to the lender before you receive the advance. The amount agreed with the lender is the full amount you will repay.

Con – Short Repayment Terms

A merchant cash advance is best used as a short-term finance option to boost cash flow. The repayment terms are generally much shorter than a traditional business loan. If you need long-term finance, we offer a range of business finance solutions that may be better suited to your needs.

Con – More Expensive Than Other Types of Finance

Because a merchant cash advance involves the lender taking on more risk than a conventional loan, an advance can generally be more expensive than other finance options.

Con – Not Suitable for Every Business

If your business doesn’t process a high volume of card payments, the amount you will be able to borrow will be limited. You may find that invoice finance or debt factoring is better suited to provide the funding you need to overcome a cash flow gap.

ScotPac Business Finance
A merchant cash advance can provide an immediate cash flow boost, but it’s not always the most efficient solution.

There are more suitable options for companies that offer extended payment terms to customers, and even for retail businesses that sell direct to consumers, there are more affordable finance options. Trade Finance could provide an instant cash injection to cover payments to suppliers and allow you to prepare your business to take advantage of peak sales seasons. Or, use your unpaid sales invoices to access a line of credit, without using your property for security.

We offer a range of business finance solutions to help you overcome cash flow blockages and secure your business’s long-term profitability. We’ll help you find the most appropriate funding for your business.