What are merchant cash advances?

Merchant cash advances are a form of debt finance also known as asset finance, explains the Business Finance Guide, published jointly by the Association of Chartered Accountants in England and Wales (ACAEW) and the British Business Bank.

It is a form of business finance known as asset finance because the assets owned by your company are used as collateral against short-term borrowing.

The particular example of merchant cash advances

Just as any other invoices receivable, the income you generate from debit and credit card sales is a current asset of your company – the income is a short-term liquid asset, since the receipts are converted into cash in a very short space of time.

Depending on the income you may expect to receive from such card sales, therefore, lenders may be prepared to offer merchant cash advances on a proportion of that expected income. In other words, you receive a cash advance – effectively a short-term business loan – which is repaid from the income generated by your card sales.

What you need

From this brief description of the principle, it is clear that in order to interest a provider of merchant cash advances, your business must conduct a significant proportion of its sales from debit or credit card purchases by your customers.

The value of receipts you need to earn in order to be eligible for a merchant cash advance varies according to the provider but is likely to be a minimum of £2,500 a month.

Subject to that basic eligibility and the lender’s assessment of the risks involved in your borrowing, you might receive a cash advance of anywhere between £2,500 and £300,000, says the British Merchant Cash Advance Association (BMCAA). This is the range also suggested on the official government website about merchant cash advances.

How it works

A merchant cash advance provider examines your records of past transactions by debit and credit card – typically taking an average of monthly sales over a minimum period of six months.

The offer of a cash advance is then made on the basis of a percentage of the sales anticipated over the following six to 12 months.

As you begin to receive income from card sales, you then repay the provider an agreed percentage of the takings – typically in a range of 10% to 30% – until you have repaid the cash advance and the charges applied by the provider. The proportion of takings you repay each month is known as the percentage split.

The advantage in repaying the advance on the basis of a percentage split is that instalments are likely to vary each month, depending on the success of your sales – if you have sold more via debit and credit cards, you repay more, and so clear the outstanding debt at a faster rate. If there is a dip in sales, you do not need to repay so much.

Merchant cash advances, therefore, may offer a helpfully variable method of raising business finance through the support of your card sales – a form of asset finance. Repayments are based on your ability to repay, rather than a fixed monthly instalment, so helping you to manage your company’s all-important cashflow.

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