How does a merchant cash advance work?

A merchant cash advance - or MCA - is a form of alternative business finance for small firms and sole traders. Whereas traditional bank loans require borrowers to pay back a set amount of funds onset dates over time, a merchant cash advance – also known as a business cash advance – works on a rather different basis, with the amount repaid at any one time proportional to turnover. That's because it's a form of finance based on a company's credit or debit card transactions. Given the difficulty of obtaining a traditional bank loan for many businesses, it's understandable that a great number turn to this innovative source of finance.

What kind of business is a merchant cash advance best suited to?

This source of business funding is best suited to firms making significant revenue from card payments via a terminal, instead of by invoicing customers and receiving bank transfers. It's quick, flexible and a scalable form of business funding. Not only is it a relatively painless process to pay back an MCA compared to a bank loan, but it's also probably much easier to obtain one. Approval rates for this financing option are high, with the scrutiny of a firm's accounts not usually required as part of the application process, particularly for smaller businesses under £30,000.

In fact, a merchant cash advance isn't technically a loan at all, so it won't even appear on a credit report.

How do I obtain a business cash advance?

• First of all, let's imagine the circumstances in which a business might consider an MCA, due to needing quick access to cash. Perhaps it's the middle of a restaurant's busiest season, and a fridge suddenly breaks. It, therefore, needs replacing as soon as possible. This may lead to looking into obtaining a merchant cash advance and checking how much money can be borrowed through this method. It's usually the equivalent of a business's average monthly turnover, so if that's £5,000 a month, obtaining an MCA of £5,000 is realistic, but borrowing £10,000 isn't.

• If a business is in reasonably good health and receives most of its payments via a card terminal, there shouldn't be too many problems obtaining this source of funding. If a cash advance is agreed, a lump sum should go directly into the business's bank account within weeks, or even days. This compares to the weeks or even months that many could be left waiting to gain access to bank finance.
• Repayment then commences through the business's credit card transactions. An MCA involves the advance provider working alongside the terminal provider, with a small proportion of each card transaction – typically about 10-15% - being paid to the advance provider until the total amount borrowed has been repaid.

The above structure means that if, for example, the agreed rate of your MCA is 15%, £15 in every £100 transaction will go to the advance provider, with the other 85%, or £85, going into your firm's bank account in the normal fashion.

What are the advantages to a merchant cash advance?

There are many advantages to a merchant cash advance. For instance, during busier periods when a business is making more money, more of the MCA will automatically be paid back, compared to leaner times when it won't pay so much. With an MCA, there's also no need to worry about keeping a certain amount of money to one side to pay on a set date - it really is a flexible, scalable and manageable form of business finance.

With high approval rates, approvals within as little as 24 hours, zero APR, no fixed term, no other hidden charges and no need to provide security or a business plan, merchant cash advances are becoming an ever-more invaluable part of many firms' cash-flow management.

An MCA also frees you up to use another type of finance alongside it, such as a bank loan or equipment lease, in the knowledge that the MCA won't imperil your entire financial future in the way that other loans can if you are unable to keep up with the repayments.  

Given such wide-ranging advantages as the above, it's no surprise that so many firms that may otherwise struggle to obtain finance – especially those in the leisure sector, such as bars, restaurants, clubs and shops – are increasingly deciding to use their future credit card receipts as a means of securing quick funding through an MCA.