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Merchant cash advance for SaaS
Merchant Cash Advances (MCA) are a well-established tool for businesses that have a proven card transaction income.
For sectors that suffer from seasonal fluctuations, MCAs provide stability, smoothing cash flow to give those companies the support they need to meet short-term expenses.
An established SaaS business benefits from recurring revenue and rarely suffers from seasonal peaks and troughs. Consequently owners and CFOs can often dismiss MCAs, relegating them as a poor fit for subscription-based business models.
But Clifton Private Finance, we’ve seen how well-placed merchant cash advances can give SaaS businesses the boost they need to balance the timing between growth requirements and revenue.
As part of your business’s funding strategy, MCAs can offer non-dilutive capital with a rapid application process, achieving a specific and powerful position in your finance toolkit.
What is a Merchant Cash Advance?
A merchant cash advance can provide SaaS businesses with an advance on future revenue based on card transactions. It uses existing card transaction data and forecasts to offer a lump sum advance that is repaid through a percentage of future card takings.
The two key factors when evaluating MCAs are factor rate and holdback percentage.
Merchant Cash Advance Factor Rate
Rather than adding incremental interest to the balance, MCAs apply an immediate multiplier to the advance, setting the repayment figure. With no interest calculation, the total repaid remains the same irrespective of the time taken to repay the advance.
Typical factor rates are between 1.1x and 1.5x and allow for a simple calculation of the final amount due:
- An advance of £20,000 with a factor rate of 1.2x would result in a total repayment of £24,000 (£20,000 x 1.2)
- An advance of £30,000 with a factor rate of 1.22x would result in a total repayment of £36,600 (£30,000 x 1.22)
- An advance of £40,000 with a factor rate of 1.15x would result in a total repayment of £46,000 (£40,000 x 1.15)
MCA Holdback Percentage
Merchant cash advance has a flexible repayment structure that rises and falls in line with your card transaction takings each month.
This is determined by a set holdback percentage, typically between 10% and 25%. The advance is repaid each month by this percentage of gross card transactions until cleared.
MCA Repayment Examples
|
Holdback Percentage |
Monthly Repayment on £40k Takings |
Monthly Repayment on £50k takings |
Monthly Repayment on £60k Takings |
|
14% |
£5,600 |
£7,000 |
£8,400 |
|
18% |
£7,200 |
£9,000 |
£10,800 |
|
22% |
£8,800 |
£11,000 |
£13,200 |
Higher holdback percentages allow the advance to be repaid sooner, releasing the obligation earlier, while lower holdback percentages put less burden on monthly cash flow over a slightly longer term.
Businesses should consider the holdback percentage when evaluating the use of MCA, determining a level that meets mid-to-long term business needs. Higher holdback percentages may offer strategic advantage.
MCA Repayment Term
With its flexible repayment method, MCAs don’t have a set term, with repayments continuing until the balance of the advance is fully repaid. It is, however, considered a short-term funding solution, with the balance planned to clear within six to nine months.
Merchant cash advances only consider your business card transactions, with each repayment calculated based on gross card transactions each month. Additional non-card income is unaffected and doesn’t form part of the MCA repayment plan.
Using Merchant Cash Advance as a SaaS Business
For SaaS businesses, MCAs provide a distinct opportunity - to manage growth timing against revenue timing.
SaaS is a cost-first, revenue-slow model that relies on lengthy subscription payments to generate profit. When a SaaS business explores growth opportunities, it can find itself stifled if the capital doesn’t exist to provide that upfront boost.
A merchant cash advance can present a way to bring forward the revenue that will come from the growth.
MCA to Manage Customer Acquisition Costs (CAC)
A business that is profitable in the long-term, but lacks cash in the short term, will find it hard to acquire customers. MCAs offer a bridge between the investment required to build the customer base and the revenue that comes from those subscriptions.
It’s important to view an MCA to fund CAC as a short-term and opportunity-based solution, rather than an ongoing or repeating finance strategy.
Over-reliance on MCAs for upfront expenses may be costly and other funding products are typically a better fit for developed finance planning. The advantage of an MCA comes through speed and flexibility as a short-term bridging and smoothing product, rather than a core long-term growth solution.
MCA to Support Sudden Scaling
Many SaaS businesses can see a sudden burst of interest. While these unexpected boosts are extremely welcome, they can lead to a desperate scramble, with new infrastructure or staffing requirements requiring immediate injections of capital. A failure to respond to this increased demand can stifle growth and, in some instances, damage future reputation.
When it is imperative that the business react decisively, MCAs can provide the funding needed to make that move. Leveraging both existing figures, plus the forecast card-based revenue, a merchant cash advance offers the cash needed with little delay, avoiding long or complex underwriting.
MCA to Fund Product Feature Expansion
Investing to improve the product also has to come before MRR (monthly recurring revenue) catches up to fund it. As with CAC, merchant cash advance can be utilised to pay for the required R&D to add features and boost the product when the figures for future MRR support the cost.
MCA to Respond to Disaster Scenarios
SaaS businesses can face disaster situations where an immediate ‘all hands on deck’ response is required to shore up problems. This may be when a product ships with an unforeseen bug or integration issue, or due to an external complication or cyberattack.
When the business needs to react without delay to limit damage and resolve issues, MCAs provide the short-term funding needed.
Merchant Cash Advance vs. Business Loans
For SaaS businesses looking to fund expansion and react to changing circumstances, the primary evaluation is between MCA and traditional business loans.
At Clifton Private Finance, we work with our clients to develop a holistic overview of the business and its funding requirements to match the correct funding to each specific need. This puts comparing MCAs to business loans as an early stage of consideration.
A merchant cash advance is a fundamentally different tool to a business loan, which offers:
- Speed - With less-complex underwriting and an evaluation based on existing card transaction data, MCAs can be set up far more quickly than secured business loans, which require asset valuation and stricter risk assessment.
- Alternate Criteria - An MCA treats traditional credit checks and history evaluation as secondary, leveraging pure card transaction turnover to determine approval. Businesses with stable subscription-based credit and debit card revenue can obtain an advance even with a weaker credit score.
- Flexible Repayments - For businesses that rely on subscription income, a repayment structure that rises and falls in line with that revenue reduces stress on cash flow, making payments easier and reducing or stretching term lengths in line with real business activity.
Merchant cash advances should always be considered a short-term product. They are best used for SaaS companies when speed is an essential component. Long-term planning with dedicated asset-based loans may be cheaper and easier to manage.
Speak to your Clifton Private Finance business funding adviser to make a comparison based on your actual circumstances.
Merchant Cash Advance vs. Venture Capital
Many SaaS businesses successfully obtain outside investor venture capital for both startup and second-round expansion. VC offers SaaS businesses long-term strategic capital over multiple years, with clear benefits during first-round capital acquisition.
However, venture capital is dilutive, and both the subsequent loss of shares and time-intensive funding process are unappealing for many smaller growth initiatives as the business develops.
For revenue-generating SaaS enterprises, merchant cash advance offers a rapid way to obtain needed short-term growth capital that does not require external investor funding. Its non-dilutive nature makes it more appealing for business owners and shareholders keen to maintain existing levels of control.
Merchant Cash Advance for SaaS FAQ
Q: Are Merchant Cash Advances Suitable for SaaS Businesses?
A: Yes. Used appropriately, MCA has an effective function in the finance strategy of an established SaaS business with significant card-transaction income, providing non-dilutive capital that can be used to smooth capital liquidity for growth and customer acquisition.
Q: Can MCAs Be Used to Fund CAC?
A: Yes. Provided customer lifetime value (LTV) and churn rates are well understood and properly analysed, MCAs can form a strategic component to funding. An MCA should only be used where forecast subscription revenue exceeds the combined cost of CAC and factor rate-adjusted advance balance for repayment.
Q: How Much MCA Can My SaaS Business Get?
A: MCA sums are calculated based on business card transaction turnover. Most lenders offer advances between 50% and 150% of average monthly debit and credit card transactions.
Q: Will MCAs Affect My Company Equity or Shares?
A: No. MCA is non-dilutive. It is an advance provided based on future card transactions used to repay the sum that does not require giving up shares or company control.
Q: Are MCAs Useful for Startup SaaS Businesses?
A: No. MCA needs your business to have established card transaction revenue and reliable forecasting based on concrete data. Startup businesses should look to traditional business startup loans or outside investment.
Discuss your startup funding needs with a startup funding adviser at Clifton Private Finance.
Q: Can MCAs Be Repaid Early?
A: Yes. Merchant cash advances don’t have a fixed term, with repayments based on a percentage of your card transactions. This means it will naturally be paid faster as revenue increases and slow during months of lower income. There are no penalties or fees for early repayment.
Q: Will MCAs Affect My Business Credit Rating?
A: Not directly. A merchant cash advance isn’t a loan, but an advance offered based on future transactions.
As such, it doesn’t impact your business credit file. However, when an existing MCA arrangement is in place, it will alter your DSCR (debt service coverage ratio) used to calculate affordability for other finance and may negatively affect subsequent finance applications.
Q: How Quickly Can My SaaS Business Obtain an MCA?
A: For businesses with provable card transaction histories, Clifton Private Finance can help you get the MCA you need without delay, often with funds available within 48 hours of application.
Merchant Cash Advance for SaaS with Clifton Private Finance
Clifton Private Finance is a whole-of-market business finance broker with established relationships with the UK’s specialist merchant cash advance lenders. We work on your behalf to compare options and obtain the most suitable finance for your business.
Our comprehensive service and holistic approach means we will work with you to evaluate your funding requirements, exploring the options available to you to meet both short-term and long-term goals.
Talk to the business team at Clifton Private Finance today to get the funding you need to propel your SaaS enterprise forward.
