Merchant cash advance: how it works, what it costs and what to watch

A merchant cash advance, or MCA, is short-term funding for businesses that accept debit and credit card payments. The lender provides a sum of money up front, and the business repays it using a percentage of its card sales, plus the lender’s charges.

The British Business Bank describes it as an alternative to a traditional small-business loan and lists it among forms of unsecured finance, because a business can obtain one without offering assets such as property or stock as security. It is one of the funding types covered in our business finance guides.

What the lender relies on is your card turnover. That makes the product available to some businesses that hold few assets, and it also shapes every risk described below.

You receive a lump sum, and the lender then collects an agreed percentage of your card sales until a fixed total has been repaid. In general it runs like this:

1. The lender reviews your card sales history, usually from your card payment provider’s statements, along with your business bank statements.
2. If it makes an offer, the offer sets three things: the amount advanced, the total to be repaid and the percentage of card sales the lender will take.
3. You accept, and the advance is paid to your business account.
4. Each day, week or month, the agreed percentage of your card sales goes to the lender. Often your card payment provider splits it off before the rest reaches you.
5. Collections continue until the agreed total is repaid.

There are no conventional repayment terms, because repayment depends on your sales. The more you take by card, the quicker the advance is cleared. A quiet spell stretches it out.

Products sold under this name differ mainly in how the lender collects. The table is a general explanation of the market, not a description of any one lender, so check which mechanism an offer uses.

Lenders look mainly at how much you take by card and how consistently. As a general guide, an application is judged on:

• Card turnover over recent months, and how much it swings between weeks and seasons.
• How long the business has been trading and taking card payments.
• Business bank statements, including existing borrowing and any other advances already being collected.
• Your sector and how seasonal it is.
• The credit history of the business and its directors.

Any offer is subject to status and lender criteria, and a full application may involve a hard credit search. No lender is obliged to offer an advance.

The cost of a merchant cash advance is usually a fixed amount agreed up front: the difference between what you receive and the total you agree to repay. It is commonly quoted as a factor rate, which the British Business Bank describes as a tool in decimal form that expresses interest rates for business financing. We do not quote typical factor rates, because they vary by lender and by business.

As a general explanation, these are the components to ask about:

• The fixed cost. The total to repay, in pounds, set against the amount advanced.
• Fees. Any arrangement or administration fee, and whether it is taken out of the advance so that you receive less than the headline sum.
• The collection percentage. The share of card sales taken each time. It does not change the cost, but it decides how hard collections bite.
• Charges for failed collections. What happens, and what it costs, if a collection cannot be made.
• Early settlement terms. Whether paying the balance off early reduces what you owe.

That makes an advance hard to set beside a loan. Ask for the total repayable in pounds and the period the lender expects it to take, then compare it with other offers using our guide to comparing lenders on total cost.

The main risk is that collections come off the top of your takings, before rent, wages and suppliers are paid. Check these points before you sign:

• Daily collections in a slow month. A percentage shrinks when sales fall, which helps, but it still reduces takings you may need in full. A fixed daily or weekly payment does not shrink at all. Run the numbers on your worst recent month.
• Thin margins. The percentage is taken from sales, not profit. On low margins a modest share of takings can be most of what the business earns.
• The total stays the same. Slow trade reduces each collection and extends the agreement. It does not reduce what you owe.
• Stacking. A second advance on top of the first means two lenders collecting from the same takings. Treat a new advance taken to keep up with an old one as a warning sign.
• Top-ups and renewals. If a lender offers more funding before the first advance is cleared, ask how the outstanding balance is treated and what the new total cost is.
• Your card payment provider. Some agreements tie you to a provider, or treat steering customers towards cash as a breach.
• Personal guarantees. No business asset is pledged, but a lender may still ask the directors for a guarantee, which makes you personally liable if the business defaults. Read our guide to how personal guarantees work first.

Most merchant cash advances to limited companies are not FCA-regulated agreements. The FCA says its consumer credit perimeter covers business lending of £25,000 or less to sole traders and small partnerships, but not to limited companies, and that business lending above £25,000 generally falls outside it.

The British Business Bank describes the providers as lenders and the advance as money that is repaid. As a matter of general market practice, some providers instead structure the agreement as a purchase of your future card receivables. The contract tells you which you are signing, and it is the contract, not the product name, that sets your rights.

A merchant cash advance is the right tool when most of your income arrives by card, sales are steady enough to forecast, and you have a short-term use for the money that will pay for itself. It fits trades such as hospitality businesses and shops and other retailers, where card takings arrive every day.

It is the wrong tool in these situations:

• Customers pay you on invoice or by bank transfer. There is too little card turnover to collect from.
• Margins are thin and the collection percentage would leave too little to cover costs.
• You need the money for several years. A product with a fixed cost and fast collections suits short-term needs.
• You qualify for a cheaper product and can manage fixed repayments.
• Takings are falling and the advance would cover losses.

Before you decide, put the collections into a cash flow forecast covering your quiet season as well as your busy one.

The closest alternatives are unsecured business loans for a fixed sum on fixed repayments, and invoice finance if your customers are businesses that pay on credit terms. The comparison below is general.

An overdraft or a revolving credit facility is also worth pricing if the gap is small and short.

Capzy is a credit broker, not a lender: we introduce your business to lenders that fund against sales and help you compare their offers with other products you may qualify for. We are paid by the lender. You can check your funding options with a soft search, which does not affect your credit score. A full application to a lender may involve a hard search.

To see who is active in this market, browse the revenue finance lenders in our directory. Funding is subject to status and lender criteria and is never guaranteed.