Relatively new to the finance world, a merchant cash advance could be perfect for your business if you don’t have many assets but have a large amount of card transactions.
As a form of alternative business finance, this is available to those who use card terminals, and the funder will manage the terminal provider to ensure that they can see what transactions are going through.
The funder will then base the amount you can borrow from the cashflow they see going through the card terminal.
Because the funder will be able to quickly see what you’re making over the month and how much money is going through the business, they won’t have to do any credit checks or look into your accounts.
This can be a good way of obtaining funding with a quick turnaround as it means the funder will be able to agree a loan amount and repayment plan much quicker than they would in a traditional finance route.
What are the advantages of merchant cash advances?
Repayments of the loan are usually a percentage of what your business revenue is every month, so they will fluctuate proportionately with your business’s income.
So, if you have a successful period, you will pay more back, but if you happen to go through a period that isn’t as fruitful, you will pay a smaller amount.
Unlike fixed payment finance, this will give you the reassurance that you will be able to make those monthly payments if you have a month where business is slow.
As the funder liaises directly with the card terminal provider, the repayments that they take is taken at source in a similar way to how you pay income tax, meaning that the repayment will never be in your business’s bank account.
The repayments are then taken automatically until the total amount is paid off.
Can I take out other forms of finance alongside it?
As a merchant cash advance facility isn’t classed as a traditional line of finance, you may be able to get other additional types of finance.
For example, if you already have a piece of machinery on a Hire Purchase agreement, you may be able to get a merchant cash advance to boost your cash flow at the same time.
What are the drawbacks of merchant cash advances?
Despite the large number of advantages to merchant cash advances, there are some downsides.
The most obvious one is the amount that you can borrow – it all depends on your turnover.
If you would like to borrow £10,000 but your income is only £2,000, it’s highly unlikely that you’ll be granted that level of funding as your cash flow would not support the requested loan amount.
So, how much will I be able to get?
It obviously varies and depends on your turnover as mentioned previously.
But, a rough guideline is to estimate that you will be able to borrow the same amount as your monthly income is – so, for example, if you made £2,000 in a month, then you’ll likely be able to borrow £2,000.
Also, as this is ideal for those businesses that only take card payments, if you receive payments in other ways then it might not be suited for your business, so if you invoice customers as well then you should look at different finance options.
The number of funders that offer this source of alternative finance is also relatively limited, depending on your card terminal provider, though there are funders out there that will look at a large range of providers.
If your cash flow situation is in a good place, and you work in a sector that is traditionally difficult to get finance, such as leisure or retail, then a merchant cash advance could be the best way to secure finance with a quick turnaround.
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