A dealer cash advance is an alternative financing method in which you sell a portion of your future sales to your vendor for a lump sum upfront.
Under this arrangement, sometimes called a business retainer, the provider takes a regular percentage of sales made through your card terminal.
Common uses for a merchant cash advance include, but are not limited to:
- equipment
- share
- Working capital
- Personnel costs
According to the British Business Bank, repayments are typically made over a period of three to 18 months.
Merchant cash advances have been around since 1998, but they have since left their mark on the alternative finance industry. “We are seeing an increasing number of providers of this type of credit facility in the market,” said Todd Davison, MD of Purbeck Personal Guarantee Insurance.
How does a merchant cash advance work in the UK?
Applications for merchant cash advances are typically much quicker than traditional loans, with approval taking hours rather than weeks. Most applications are submitted online directly to the provider.
Before applying, make sure you can provide the required documents. You don’t need a business plan, but you do need proof of card transactions, such as bank statements. Vendors will also want to see basic details like your business name and average monthly revenue, as well as the amount of financing you want. You must be a sole trader, partnership or limited company based in the UK. To be eligible, you’ll likely need to have been trading for a minimum period of time — say three months — making it difficult for new businesses or start-ups to get this form of funding.
The final point regarding eligibility: you want to make a minimum amount (e.g. £10,000 per month) from card sales.
Once your approval is granted, you will receive your funds within 48 hours. Repayments are quoted together with a “factor rate”, which is a fixed equivalent of the APR and acts as a multiplier. They usually start at 1.1 but can go beyond 1.5. The lender will decide how long you have been in business and how your card earnings fluctuate from month to month and year to year. So if you get £20,000 with a factor of 1.2, you’ll pay back a total of £24,000.
Between 10 and 25 percent of card transactions go to the lender and are automatically debited daily, weekly or monthly.
Is a merchant cash advance a loan?
You could say that it is essentially an unsecured loan. However, because financial services earn a percentage of your future card sales and do not have traditional credit, merchant cash advances are much more opaque and difficult to define. Therefore, they are generally not considered loans.
To give you an idea, we compared a merchant cash advance to a traditional business loan.
| Cash advance from the dealer | Business Loan |
|---|---|
| Repayments based on card terminal sales | Repayment amount agreed in advance |
| Approval usually within 48 hours | Approval can take several weeks |
| You don’t need good credit | Need strong credit |
| No security is required, but assets can be seized in the event of late payment | Asset required as security |
| No late payment interest | Interest, administration and late payment fees will apply |
| No business plan required, but receipts/credit card statements and business account statements are required | Business plan required |
| There is no advantage to early repayment | Early repayment saves you interest and can improve your credit score, but you may incur prepayment penalties and miss out on tax benefits |
| May have a high APR | Lower APR |
| Unregulated market so providers can decide what they want to charge | The regulated lenders therefore stuck to more conservative interest rates and were more open about fees |
Who Offers Cash Advances for Merchants?
As it is a growing market, we have listed just a few UK providers below, along with some key features of their merchant cash advance packages.
- 365 Finance
- core
- Capify
- Momenta Finance
- YouLend
- 90% approval rate – approved within 24 hours
- Dedicated relationship manager
- Fund options of less than £10,000, £10,000 to £50,000 and over £50,000
- Borrowing up to 125 percent credit
- Amounts up to £3,000 up to £150,000
- Payment of £5,000 – £500,000
- Dedicated account manager
- Must have at least 12 months trading records
- Must earn at least £20,000 per month
- At least £30,000 per month via card terminals. At least 12 months trading history.
- There can be no other cash advance – unless it is a refinancing
- The advance amount is calculated at up to 120% of the card proceeds, up to a maximum of £150,000. Minimum advance £30,000.
- Factor rate from 1.18 x
- Top-ups are possible after four months
- Works with all card terminal providers
- Funding from £500 up to £1,000,000
- Over 90 percent approval rate for same-day offers
- Apply in five minutes or less
365 Finance
core
Capify
Momenta Finance
YouLend
Is a merchant cash advance right for my business?
A merchant cash advance is a faster, more flexible arrangement that adapts to your cash flow as long as you keep an eye on it. If you have good monthly pass sales, remember that a higher percentage is charged and take that into account.
On the positive side, there is no late payment interest associated with them and there is no need to offer assets such as real estate as security. However, you may be required to provide a personal guarantee. “Most (MCAs) require personal guarantees, so we are seeing demand for personal guarantee insurance (PGI) associated with these facilities,” Davison said. “PGI protects the business owner’s assets should the business fail.”
Keep in mind that the merchant cash advance industry is unregulated in the UK and therefore is not subject to the same rules as traditional lenders when it comes to the level of their fees. It goes without saying that you need to be up to date on both the prices and the terms and conditions. It is also one of the more expensive forms of financing with corresponding effective annual interest rates that can be up to 200 percent. Overall, there is a higher risk with quick financing. So be prepared for bigger consequences.
So, is a merchant cash advance specifically suitable for your business?
First, consider what type of business you have. Managing Director Forbes BurtonRick Smith, has some insights: “Typically, the way this works is that a seller pays back the loan more quickly if they have a high volume of sales, but (merchant cash advances) are particularly effective for businesses that have seasonal ups and downs, such as: “as tourist attractions, holiday destinations and those tailored to a specific season.”
Make sure you are clear about what is expected from the agreement. “Businesses generally need to check repayment terms with lenders as these can vary greatly from provider to provider. “So being aware of the conditions before you even get started is invaluable,” Smith said. “Lenders default to looking at your transaction history to determine their loan amount, but they also rely on other information. So it’s really important to have the most thorough records possible.”
Also note that providers may reject you depending on the card terminal you use. However, as cash advances from merchants become more common, this is becoming the case in fewer and fewer cases.
Finally, this type of financing could be a suitable option if you need a short-term solution and have been rejected by other providers. Geoff Whiteland, Director of British business investmentsaid: “Merchant Cash Advance can provide a transparent and aligned financing option for smaller businesses, including some that may otherwise be unwilling or unable to obtain financing through traditional methods.”
“As with any financial decision, it is important for businesses to carefully consider their options and select the MCA provider that is best suited to their needs,” added Rob Straathof, CEO of Liberis. “When looking for an MCA provider, companies should pay attention to important factors such as fees, repayment terms and the provider’s reputation. This will help businesses ensure they receive the best possible deal and can manage their finances effectively over the long term.”
further reading
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