Merchant Advances (MCA)
Merchant Advances (MCA) are loans secured against the credit/debit card receipts of a business. The facilities are structured as a lump-sum loan in exchange for an agreed-upon repayment via a percentage of future credit/debit card sales. Advances are very flexible and can scale with the growth of the business. This form of finance is popular in retail and leisure.
Features of Merchant Advances
What is a Merchant Advance?
A merchant cash advance, or MCA, is short-term funding for businesses that accept debit and credit card payments, and is an alternative form of finance to a loan.
With an MCA, lenders provide businesses with a sum of money upfront which the business repays using a percentage of its card transaction sales, plus fees. These repayments can be made on a daily, weekly or monthly basis
Unlike loans, companies can acquire an MCA without needing to offer up assets for security, such as property or inventory, to access funding. They can be a good alternative for businesses with few assets, or a limited credit history. Businesses rejected for other types of funding may still qualify for a merchant cash advance, and they are most suited for businesses with a high volume of card payments.
How does an MCA work?
Traditionally, the MCA repayment works as follows:
Business approaches the lender for a merchant cash advance.
The Lender establishes the business’s factor rate – (the fee charged by the merchant cash advance provider) which is a tool in a decimal form that expresses interest rates for business financing – and then lends the company an upfront sum.
The repayments are deducted daily, weekly, or monthly via a percentage of the company’s sales, plus interest, until the amount is repaid in full.
The amount repaid is determined by debit and credit card sales; however, a typical deduction can be around 10% of each card sale.
Repayment time scales for MCAs typically range from three to 18 months.
Unlike other loans, there are no conventional repayment terms as they are subject to the company’s sales; the higher the number of debit or credit card purchases, the quicker the advance can be repaid.
What can MCA's be used for?
Because of its quick turnaround times MCA’s can help businesses with urgent capital requirements, short-term expenses, or cashflow requirements.
Examples of these include:
- Stock Purchase
- Premises repairs or expansion
- Marketing and advertising
- Large order funding
- Working capital
- Paying VAT or tax bills
- Purchase of plant or office equipment
Advantages & Disadvantages
There are a number of considerations to be borne in mind before choosing a merchant cash advance, both positive and negative, and whether it is a right fit for your business.
Advantages
- Flexibility: An MCA offers more flexibility than a secured loan and can be used for multiple purposes, such as purchasing inventory or covering payroll.
- Speed: Accessing an MCA can be easier than applying for a business loan and requiring less documentation which makes the application process faster. The funds can be received into business accounts quickly sometimes in as little as a few hours.
- Adaptable repayment plan: A credit line provides bespoke repayment terms which work with the growth of the business; e.g. seasonal shifts reduce the monthly revenue, and the company only needs to pay the minimum amount due.
Disadvantages
- Cash Flow Impact: The impact of frequent deductions of MCAs from incoming sales receipts can impact a business’s cash flow.
- No early repayment gain: The business pays a fixed amount of fees and are restricted from making early repayments so are unable to benefit from interest saving through early repayment.
- Cash payments redundant: MCAs work on card transactions only, and encouraging customers to pay via cash through special offers or promotions can be seen as a breach of conditions by the lender.
- Expensive: The higher fees and interest rates with MCAs can be more costly than other funding options.
- Amount: Most lenders will offer a loan 1-2 times monthly card turnover. If a significantly higher loan is required a MCA is probably not the correct loan product.
FAQs
What type of business is a merchant cash suitable for?
Merchant cash advances are suitable for businesses who receive their sales via a substantial volume of card transactions, whether online or face-to-face.
Many businesses could benefit from MCAs, for example:
Retail businesses: Shops can use an MCA to purchase additional stock to cover seasonal highpoints such as Christmas or Easter.
Hospitality: Restaurants, cafes, and hotels may use an MCA to purchase ingredients, kitchen appliances, tables and chairs, utensils, wall decorations, or renovations.
Trade businesses: Service businesses like electricians, plumbers or gardeners could use an MCA to fund higher value jobs entailing the purchase of necessary tools or materials to complete these jobs.
What documentation will a lender require?
Lenders will look at card turnover volume and history first but will also want to see business financial records, as a minimum bank statements. This is to mitigate and identify risk factors and as an unsecured lend they will will also want to see filed annual accounts and possibly tax records.
The more information the lender has about the business, the more accurate their offer will be.
Is security required for an MCA?
Unlike business loans, companies can apply and obtain an MCA without needing to offer up assets for security, such as property or inventory. Personal guarantees can also be requested by the lender depending on the loan amount and risk profile.
What are the alternatives to an MCA?
Merchant cash advances MCA’s should only be used by businesses that can repay the MCA quickly and successfully.
MCAs are more suited for short-term cash flow solutions.
Longer term solutions for business owners which may be more cost effective include secured business loans and asset finance.
Next Steps
Given the multitude of merchant cash advance providers available, trying to find the most suitable type for your business, and finding the perfect lender for your specific business circumstances can be a labour-intensive and time-consuming process.
Therefore it’s a good idea to seek independent, specialist financial advice before deciding on the right type of finance to apply for.
For an initial no obligation call or meeting, please contact us to arrange.