If your business takes a lot of card payments, such as a restaurant, salon, gym or shop, you’ve probably seen adverts for a merchant cash advance (MCA). It can be a useful tool, but it works very differently from a loan, so it’s worth understanding before you sign.
How it works
The provider gives you a lump sum up front. In return, you agree to repay that sum plus a fixed fee through an agreed percentage of your future card takings.
Each day, a small share of your card sales goes to the provider until the total has been repaid. On a busy day you repay more, and on a quiet day you repay less. There’s no fixed monthly instalment.
How the cost is shown
MCAs are usually priced with a factor rate rather than an interest rate. For example, a factor rate of 1.2 on £20,000 means you repay £24,000 in total.
That total doesn’t change however quickly or slowly you repay. So if trade is strong and you repay in six months, the effective annual cost is much higher than if it takes twelve months. Comparing an MCA with a loan’s APR isn’t straightforward, so always compare the total amount you’ll repay.
The advantages
- Repayments flex with trade. This is helpful for seasonal businesses or those with uneven months.
- Decisions are often quick, because the provider looks mainly at your card sales history.
- Less focus on credit history than many loans, although checks are still made.
- Usually no security over property.
The drawbacks
- It can be expensive compared with a standard business loan, especially if you repay quickly.
- It’s only for card-taking businesses. If most of your income comes from invoices or cash, it won’t fit.
- It reduces your daily cash flow until it’s repaid, so make sure the remaining takings cover your costs.
- Watch out for renewals. Taking a new advance to clear an old one can become a cycle.
When it can make sense
An MCA is often worth considering when:
- you need funds quickly for a specific opportunity, such as stock or a refit
- your card takings are steady and well documented
- a fixed monthly repayment would be hard to manage in quiet months
Our approach
We’ll show you an MCA alongside any loan options you qualify for, with the total repayable for each, so you can see the real difference. If a cheaper product is available to you, we’ll say so.