For many business owners, peaks and troughs in revenue are inevitable. Whether you're a retailer experiencing fluctuations in footfall or a hotel relying on seasonal visitors, managing cash flow can be a challenge.
In addition to traditional business loans, merchant cash advances can help SMEs stabilize their cash flow and provide business owners with the breathing space needed to grow. Read our short guide to merchant cash advances, including how they work, the pros and cons, and other funding solutions available from Fleximize.
What is a merchant cash advance?
A merchant cash advance, or a business cash advance, is a short-term business loan. The lender offers finance to a business in exchange for a small percentage of future card sales, paid back in instalments.
How does a merchant cash advance work?
Generally, the lender will evaluate previous card sales and offer an advance based on the average value of these monthly sales. Then, the business pays the provider a pre-agreed percentage of daily card sales until the full amount is fulfilled (the initial capital plus the fee for using the facility). As lenders work directly with your card terminal provider, these repayments are taken automatically.
How much you pay back in total will depend on fees and repayment percentages. Set up costs and broker fees may also be included, so it's important to bear these in mind when considering a merchant cash advance.
The repayment percentage refers to the agreed amount, or percentage of sales, which you need to repay. For example, if your repayment percentage is 10% and you make £10,000 in card sales in January, you'll pay back £1000 that month (plus fees). This amount will be split into daily payments. If you make £15,000 in card sales in February, you'll pay back £1500 that month (plus fees).
Essentially, the repayment percentage remains constant whilst the actual amount you pay back fluctuates in proportion to your card terminal sales figures.
What are the benefits of a merchant cash advance?
A merchant cash advance can be a great option for SMEs in industries that experience fluctuating incomes, such as cafes, B&Bs, restaurants and retailers. Here's why:
- Improve cash flow: Merchant cash advances keep things ticking over during off-peak or quieter months. Providing you primarily rely on card payments and see a high volume of card transactions in the average month, this type of finance can help you better manage cash flow by bringing forward future card sales when you need them.
- Simple repayments: Repayments are taken directly from the card terminal provider, so you never need to make payments yourself.
- Accessible funding: Many businesses have either no or few assets, and would prefer not to offer these as security against a business loan. Fortunately, there's no need to provide property or valuable business assets as collateral if you opt for a merchant cash advance.
What are the disadvantages of a merchant cash advance?
If you’re considering applying for a merchant cash advance, remember that this form of finance doesn’t necessarily suit all types of businesses and could come with some drawbacks.
- Limited loan amount: Merchant cash advances can be problematic for businesses that take lots of sales by means other than card terminals, like bank transfers or online payments. As the loan facility is calculated on total card sales, rather than across all payment methods, you may be limited in how much you can borrow.
- Additional restrictions: There are usually many restrictive covenants in a merchant cash advance contract, and there can be strict rules regarding how your business operates. For example, you might be unable to give discounts or deals to customers who pay by card, as this could affect repayments.
- Higher fees: Borrowing money using a merchant cash advance can be costly with set-up fees, inflated costs of borrowing and early repayment charges.
Alternatives to a merchant cash advance
Merchant cash advances are just one of many alternatives to traditional bank loans. If you don’t qualify for this form of finance, you could consider applying for other financing options such as Fleximize’s range of flexible business loans.
Our small business loans can be tailored to your needs, and provide much more flexibility than merchant cash advances, with perks such as repayment holidays and top-ups. When repaying a merchant cash advance, your options are quite rigid, with money taken by the provider each day. Our products, however, only require monthly repayments to give borrowers more breathing space. Fleximize's business loans also have no set-up or hidden fees, and there's no charge for early repayments.
Fleximize's business loans are suitable for a vast range of SMEs, including businesses that rely on payments methods other than card. Our lending process takes into account the total revenue of a business, irrespective of whether you make your sales using card, cash, or bank transfer. As businesses can borrow two months' revenue, up to the amount of £500,000, the potential lending amount may be far larger with a Fleximize business loan compared to a merchant cash advance.
Why choose Fleximize?
Finding the best business loan often comes down to choosing a lender you can trust. That’s why it’s good to know we’re a multi-award-winning digital business lender and have lent over £200 million to thousands of SMEs since launching in 2014.
- Flexible: Borrow from £5,000 to £500,000 with flexible terms of up to 48 months. Top-ups and repayment holidays come as standard and we won’t penalize you for repaying early.
- Fast: Apply online in less than five minutes and get a decision, and possibly your loan, in as little as 24 hours.
- Personal: Get funding tailored to your needs and deal with a dedicated contact throughout.
- Trusted: Our customers have named us the UK’s Best Business Finance Provider at the British Bank Awards, twice. We’re rated ‘excellent’ on Trustpilot too – check out our customer stories and awards.