How a Merchant Cash Advance Can Help Your Business Grow

A Merchant Cash Advance provides a flexible and powerful solution to help smooth cash flow for businesses that bring in a significant portion of their turnover through card transactions. Used strategically, a merchant cash advance can release capital, giving you the reserves you need to achieve the next phase of your business growth.

With its flexible repayment schedule and clear fees, merchant cash advances offer B2C businesses a comfortable and understanding funding structure that helps overcome seasonal difficulties, removes pressure from working capital, and can improve your business’s agility.

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Merchant Cash Advance Explained

A merchant Cash Advance (MCA) is designed to be:

• Simple
• Flexible
• Predictable

It provides funds based on your future card transactions and can be a useful solution for businesses with a proven track record of card transactions who are looking to boost working capital     .

A merchant cash advance works as follows:

• You borrow a lump sum for immediate business use
• A total repayment amount based on the factor rate is set
• A repayment rate or ‘split’ is agreed
• A percentage of future transactions is taken equal to the repayment rate
• The debt is cleared once the repayment amount is met

Consider the following illustrative example:

YYY repays the merchant cash advance as follows:

YYY Coffee Co MCA Repayments

At the end of ten months, YYY has repaid the advance entirely. The repayments rose and fell in line with sales, ensuring they remained affordable during the quieter months and made greater progress during busier times.

Merchant Cash Advance Structure

Merchant cash advances utilise three key structural factors that make the product uniquely suited to B2C businesses looking for simple, predictable short-term funding.

Factor Rate vs. Interest

Unlike many other business loans, a merchant cash advance works with a factor rate rather than accruing interest over time. This means that the repayment amount is known from the start and will not change throughout the term. For businesses looking for a fixed repayment figure set from day one, this presents a clear solution.

Factor rate is determined by the lender and isn’t tied directly to the Bank of England base rate, meaning it stays fixed even if market conditions change.

Different lenders may offer different factor rates based on their risk assessment and underwriting. At Clifton Private Finance, we will compare lenders on your behalf to obtain a factor rate that is the most competitive for your needs.

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Percentage-Based Repayment

The repayment rate or ‘split’ provides a flexible repayment level that is in line with your income each month. During times when business is good, a larger repayment is made, while weaker periods result in a smaller repayment that reduces strain on your cash flow. This is true even for a month with zero card transactions, resulting in no repayment for that period.

Repeated zero-turnover months may prompt the lender to check that the business is still trading, and alternative arrangements for repayment may be required.

This percentage-based repayment system allows for seasonal fluctuations - for example, businesses with strong summer takings and weaker winter ones will repay more during June to September, and less from November to February. It is a system designed to help businesses meet their repayments more easily.

Flexible Term

While a traditional loan is based on a fixed term and calculated monthly repayment, a merchant cash advance has no fixed term. Instead the sum is repaid flexibly each month until the total repayment amount is cleared.

Stronger business months shorten the term naturally, while quieter periods extend it. This allows the repayment schedule to follow your business performance rather than forcing you to meet an inflexible monthly obligation.

Uses for Merchant Cash Advance

Merchant cash advance is a flexible short-term solution that can be used for a wide range of applications - from steadying cash flow to powering growth initiatives.

Merchant Cash Advance to Relieve Cash Flow Pressure

Cash flow strain can cause businesses to struggle unnecessarily. This is especially true in situations where seasonal fluctuations mean the money is confidently expected in the near future.      

Businesses that are under pressure to pay regular outgoings, such as salaries, rent, or supplier invoices, can turn to merchant cash advances to relieve that pressure and smooth the coming months until business lifts once more.

As an illustrative example, consider a hotel business in an area with high winter tourism. During the late summer months, money becomes stretched, and meeting obligations is more difficult.

Potentially faced with having to lay off staff or delay payments to suppliers, the business owner is frustrated. After all, come November, the hotel will fill solidly, and business will be booming; some weeks are already fully booked.

Merchant cash advance provides the capital needed to get through September and October. Bills are paid, and payroll is met. Over the winter, repayments are made easily, clearing the advance and leaving plenty in the bank to avoid a similar problem the following year.

Merchant Cash Advance to Launch a Product

Expanding your business through new product innovations requires investment capital, which can sometimes be hard to come by - especially if you want to maintain 100% control over the company.

A merchant cash advance could provide those funds, allowing you to invest in development and marketing, with future sales contributing to the repayment of the advance as the product builds momentum.

Merchant Cash Advance to Renovate Premises

Customer-facing businesses that lack ongoing investment in the building can suffer slumps that may become devastating. A downward spiral may present itself, where customers are needed to provide the capital for investment, but they’re not coming because the business’s presentation is poor.

A merchant cash advance can offer the solution, as this example illustrates:

Merchant Cash Advance to Compete at a Higher Level

With innovations in technology offering businesses advantages in every sector, those companies that fail to adapt can find themselves falling behind. Conversely, by embracing new advancements, businesses can secure a competitive edge that puts them ahead of the curve and secures future business.

Merchant cash advance can be used to provide the funds needed to invest in new technologies, from upgrading hardware and infrastructure, to use in training and professional education. With the boost gained through new efficiencies and the flexibility of merchant cash advance repayment schedules, the advance can be repaid over future months.

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Qualifying for Merchant Cash Advance

In order to be eligible for a merchant cash advance, your business must show stability and a proven track record of card transactions.

For many lenders, this means:

• Your business must be at least six months old - though some specialist lenders consider merchant cash advance from four months of trading.
• You must demonstrate reasonable levels of existing card transaction sales. This is typically £2,500+ per month, with different thresholds based on individual lender criteria.
• A personal director’s guarantee may be required. Some lenders will ask for this, especially if your business has only been trading for a short while.

Unlike other business loan structures, however, the flexibility of a merchant cash advance means:

• Lenders are unlikely to ask for comprehensive business plans or project plans - with a clear forecast based on card transactions, these in-depth documents are rarely required.
• Less weight is placed on business credit history - the track record of card transactions will supersede standard credit checks for most lenders.

Merchant Cash Advance Pros and Cons

Pros

• Fast - Merchant cash advance applications are swift, often providing cleared funds within 48 to 72 hours.
• Flexible - Percentage-based repayment is extremely flexible and provides breathing room whenever needed.
• Predictable - The final repayment figure is set from day one, remaining unchanged even if the term is unexpectedly extended through a downturn in business.
• Cost - Compared to many traditional interest-based loans, merchant cash advance factor rates can be less competitive.
• B2C Only - Merchant cash advance is only available to businesses that have consistent and regular card transaction income.
• Limitations - Once in place, a merchant cash advance may restrict the use of discounts or other incentives that encourage customers to pay through other means.

Cons

• Cost - Compared to many traditional interest-based loans, merchant cash advance factor rates can be less competitive.
• B2C Only - Merchant cash advance is only available to businesses that have consistent and regular card transaction income.
• Limitations - Once in place, a merchant cash advance may restrict the use of discounts or other incentives that encourage customers to pay through other means.

Alternatives to Merchant Cash Advance

At Clifton Private Finance, we consider your business circumstances in full, advising you on the best solution to meet your needs. For many B2C companies that often means the flexibility and simplicity of merchant cash advance.      

However, should an alternative be more suitable, our experts will discuss your options in full. Some alternatives to merchant cash advance when looking to grow your business include:

• Secured loans - Businesses with property or other significant assets can obtain low-cost secured loans at competitive rates.
• Unsecured loans - For companies lacking securities, unsecured loans (often backed by a director’s guarantee) can be a strong fit for mid-term financing.
• Invoice finance - Providing short-term and cash flow solutions for B2B businesses, invoice finance offers similar advantages to merchant cash advance for those companies dealing with invoice-based business clients.
• Inventory finance - Used to purchase stock or to leverage the value of existing stock, inventory or stock finance offers retail businesses a low-cost alternative to MCA.
• Credit cards and overdrafts - For short-term financing, business overdrafts and company credit cards can provide instant access to funds where needed.
• Asset finance - When looking to expand your business with equipment, machinery, or vehicles, asset finance offers a range of alternative options that may be suitable.

Merchant Cash Advance with Clifton Private Finance

Clifton Private Finance is a whole-of-market business financial broker. We work on your behalf to match you with the right lenders and funding products to meet your specific requirements.

Our expertise provides you with a top-quality service that makes the process of obtaining a merchant cash advance easier, with competitive factor rates and flexible repayment rates.

Contact us today for a free consultation and in-depth advice on merchant cash advances and help take your business to a brighter, easier future.

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