Merchant cash advance

What a merchant cash advance is

A merchant cash advance (MCA) is short-term funding for businesses that take debit and credit cards. The provider pays you a lump sum, then takes a fixed percentage of your card sales until an agreed total has been repaid. The British Business Bank describes it as funding repaid using a percentage of its card transaction sales, plus fees.

Most MCAs are structured as a sale rather than a loan: you sell part of your future card receipts. One card-payment provider’s terms call the product a purchase of future account receivables and say it is not a business loan or an overdraft. That structure is why there is no interest rate. The price is a factor rate, a multiplier applied to the advance.

How to work out what an MCA costs

1. Enter the advance and factor rate from the offer. The total you repay is the advance multiplied by the factor rate.
2. Enter your average monthly card sales. Use a realistic figure for the months ahead, not your best month.
3. Enter the holdback. This is the share of each card sale the provider keeps. A higher holdback repays faster.
4. Read the time to repay and the effective annual cost. The fee is fixed, so the faster you repay, the higher the annual cost. Compare it with a loan quoted over a similar term.

When businesses use one

MCAs are built for businesses with steady card takings: shops, restaurants and pubs, salons and trades. The British Business Bank names retail, hospitality and trade businesses among the users. Uses include seasonal stock and short gaps in cash flow.

Providers assess mainly your card sales. The British Business Bank says MCAs should only be used by businesses that can repay the MCA quickly and successfully. For a longer-term need, a term loan with a fixed rate is usually cheaper.

How much you can get

Providers size an advance on your card turnover, not on your balance sheet. The British Merchant Cash Advance Association (BMCAA) says you could receive up to 200% of your monthly card turnover, and that advances run from as little as £1,000 up to £1,000,000 or more.

Most funders want a minimum level of card sales. The BMCAA puts it at £2,500–£5,000 a month. One provider’s published minimum is lower, at 1,500 GBP a month.

Holdback, term and conditions of repayment

The holdback (or split) is the share of each card sale that goes to the provider. The British Business Bank says a typical deduction can be around 10%; the BMCAA gives a range of 10% to 18% of daily card sales.

There is usually no fixed term. Repayment typically takes three to 18 months, according to the British Business Bank, and it depends entirely on your sales. One UK provider’s terms set “a minimum monthly amount of up to 3% of the total amount owed”, so a quiet month does not stop repayments altogether. Check how your own agreement defines and tests the minimum.

Some providers offer a top-up once a minimum of 50% has been repaid. A top-up restarts the cost on the new money, so price it as a fresh advance.

What it costs

The cost is set by the factor rate. The BMCAA says it typically ranges between 1.1 and 1.5, and gives its own worked example: £30,000 × 1.25 = £37,500. Example Worked example (our arithmetic): £37,500 repaid − £30,000 advanced = £7,500 cost, whether you repay in four months or fourteen.

That is the catch. Because the fee is fixed, repaying quickly makes the annual cost higher, not lower. The British Business Bank lists among the drawbacks that there is nothing to gain from repaying early and that MCAs can be more costly than other funding options. The calculator turns the factor rate into an effective annual cost so you can compare it with a loan. Example With the default inputs (£20,000 at 1.25, 10% of £20,000 a month) repayment takes about 12.5 months and the effective annual cost is about 50.6%. At a 15% holdback the same £5,000 cost is repaid in about 8.3 months, and the effective annual cost rises to about 80%.

Other charges are uncommon. The BMCAA says most providers do not add extra charges, hidden fees, late payment penalties, or early repayment fees. If you use a broker, ask how they are paid: the BMCAA notes many are paid a commission by the lender on the drawdown of funds.

Security, guarantees and covenants

There is no charge over property or stock. The British Business Bank notes you can get an MCA without needing to offer up assets for security. Personal guarantees are common, though. The BMCAA says some providers may ask for a personal guarantee as security; one provider asks shareholders owning 25% or more of the company to give one.

There are no financial covenants, but the agreement controls how you trade. Read these conditions before you sign:

• Taking payments by card. Steering customers to cash with offers can be seen as a breach of conditions.
• Bank and card-terminal provider. Some agreements stop you changing your business bank account or card-payment provider until the advance is repaid (example terms; provider FAQ).
• Closures. One provider requires notice if you will not take card payments for 7 days or more.
• Default. The BMCAA warns that missing repayments, switching processors without telling the provider, or ceasing to trade could lead to legal action.

Who qualifies

You need to take card payments, be UK based and meet a minimum card turnover. The BMCAA says funders look for a trading history of at least 3–6 months, and that most lenders require at least six months in business.

Some sectors are commonly declined, including estate and letting agents, travel agents, financial services, debt collection, events businesses, car sales, charities and gambling (BMCAA). Expect to provide recent business bank statements and merchant statements, usually from the last 3 months.

Regulation. The BMCAA says the sector is unregulated and does not fall under the Financial Conduct Authority’s (FCA) jurisdiction, because an MCA is usually a purchase of receipts rather than credit. Treat that as “usually not FCA-regulated”. HM Treasury and the FCA note that some lending under £25,000 to sole traders and small partnerships is inside the regulatory perimeter, so sole traders and partnerships should check the agreement and the provider’s status. Introductions by a broker can be regulated above £25,000 too. Check any firm on the FCA Register.

Who provides them

• Specialist MCA and revenue-advance firms, which fund from your card data.
• Card-payment providers working with a specialist funder. The advance is offered through your card terminal provider and funded by a partner, who may pay the provider a commission (example terms).
• Brokers and marketplaces that compare offers from several providers (BMCAA).

Pros and cons