Merchant cash advance explained for UK limited companies

If your company takes a lot of payments by card, you may come across a merchant cash advance, often shortened to MCA. It's a form of business funding built around your card takings, and it works quite differently from a normal loan. This guide explains how it works, who it can suit and what to check before you sign.

How a merchant cash advance works

With a merchant cash advance, a provider pays your business a lump sum upfront. In return, you agree to pay back a fixed, larger amount out of your future card sales.

Instead of a set monthly repayment, the provider takes an agreed percentage of each card payment your business receives. This is usually arranged through your card terminal provider, which splits each day's card takings: most goes to you as normal and the agreed share goes to the cash advance provider. Some arrangements collect from your bank account instead, based on your card sales.

Repayment continues until the full agreed amount has been paid.

What it costs, and why it's different

A loan usually charges interest over time. A merchant cash advance usually works on a fixed cost agreed at the start. The provider tells you how much you'll receive and the total you'll repay, and the difference is the cost. Providers sometimes express this as a "factor rate", which is simply the total repayable divided by the amount advanced.

That has some important effects:

• The total cost doesn't usually fall if you repay faster. On a busy month you pay back more quickly, but you still pay the same total.
• It can be hard to compare with a loan. Because there's no interest rate in the usual sense, an MCA can look cheaper or dearer than it is. If an advance is repaid over a short period, the cost relative to the time you had the money can be high. Ask the provider to help you compare it like for like with other options.
• Early settlement terms vary. Some providers offer a discount for settling early and many don't. Ask before you sign.

Who a merchant cash advance can suit

An MCA is mainly designed for businesses that take regular card payments, such as cafés, restaurants, pubs, shops, salons and other businesses that sell directly to the public.

It can suit companies that:

• have steady card takings, but cash flow that goes up and down with the seasons
• would prefer repayments that rise and fall with their sales rather than a fixed monthly amount
• need funding for things like stock, a refit or a busy period

Because the provider looks closely at your card sales history, it may consider businesses that some lenders would not. Every provider has its own criteria, and any offer is subject to its own checks.

The advantages

• Repayments follow your sales. In a quieter week you pay less; in a busier week you pay more.
• No fixed monthly payment to find on a set date.
• A clear total cost agreed upfront.

The disadvantages and risks

• It can cost more than other finance, especially when repaid quickly.
• Repaying faster doesn't usually save money.
• You may need to change card terminal provider to one that works with the cash advance provider, and you may not be able to switch again until the advance is repaid.
• Your cash flow takes a share of every card sale, so make sure the business can run comfortably on what's left.
• Guarantees may be needed. Some providers ask a director to sign a personal or performance guarantee. Read it carefully and take independent legal advice if you're unsure.
• The protections can differ from a loan's. A merchant cash advance is usually set up as the purchase of your future card sales rather than as a loan, so some rules that apply to loans may not apply. Read the agreement in full.

Questions to ask before you sign

1. How much will I receive, and what is the total I'll repay?
2. What percentage of each card payment will you take?
3. Will I need to change card terminal provider, and are there costs for doing so?
4. What happens if my card sales drop sharply, or stop for a while?
5. Can I settle early, and would that reduce the total?
6. Are there any fees on top of the agreed cost?
7. Will a director need to give a guarantee, and what does it cover?
8. What happens if I change how customers pay me, or close a site?

A reputable provider or broker will answer all of these clearly and in writing.

Alternatives worth comparing

A merchant cash advance isn't the only option for a business with card takings. Depending on your company, it may be worth comparing an unsecured business loan, a revolving credit facility, asset finance for equipment, or invoice finance if you also sell to other businesses on credit terms. A broker can help you weigh these against each other.

How LendFinder can help

LendFinder is an introducer, not a lender or broker, and we only work with UK limited companies. Our enquiry form asks whether your company takes card payments and roughly how much it takes by card each month, so we can introduce you to a partner broker whose lenders suit your situation, including cash advance providers where that fits. Our partners may pay us a fee for the introduction; you don't pay us anything.

Any finance is subject to status and the provider's own checks, and there's no obligation to go ahead. You can start an enquiry in about a minute.