Is a merchant cash advance a safe option?

A merchant cash advance is a great, safe option for small to medium-sized businesses that operate on fine profit margins - in other words, precisely the kind of business that can be especially susceptible to unexpected cash-flow problems - and need access to finance. Many businesses attempt to obtain such funding from the bank, only to have been flatly rejected. It's a situation that many an owner of a small to medium-sized enterprise (SME) has experienced, and it may have led to considering the wide world of alternative business finance.

Certainly, if there is one form of alternative business finance that has attracted particular attention in recent times, it is surely the merchant cash advance or MCA.

What is a merchant cash advance?

To sum it up in a sentence, a merchant cash advance is a means of raising finance that is based on a company's credit card turnover. It may also be referred to as a business cash advance (BCA), and it's a product that differs markedly from the more familiar bank loan, which can often run into many thousands of pounds and tends to come with quite stringent terms for repayment.

The merchant cash advance, or MCA, is a very different phenomenon – indeed, you may use one to borrow only a relatively small amount, and it is renowned for its flexibility, scalability and convenience. MCAs have traditionally been more of a fixture of the American business finance scene than the British one, but they have gained in prominence on these shores since being imported here in the late 2000s.

How does an MCA work?

An MCA often involves a smaller sum associated with a traditional bank loan – typically a figure up to the borrowing business's monthly average turnover – but funds can be accessed much more quickly than with a bank loan. Repayments are then made as a proportion of credit card receipts. If a business goes through a lean period, then less money is paid that month, whereas at the height of a firm's peak season, more of the money is paid back.

The repayments are all done automatically once the MCA has been set up, which goes some way to showing why merchant cash advances are often cited as a 'hands-off' means of accessing and repaying business finance. The aforementioned qualities also give MCAs a reputation as a safe finance product for small independent businesses and individuals.

Is an MCA a mainstream-ready alternative to a traditional bank loan?

Despite the fact that it was barely known about in the UK a decade ago, in many ways an MCA is a mainstream-ready alternative to a traditional bank loan. It draws upon the revenue that a business gains from credit card payments, typically requiring a small percentage, such as 10-15%, of all a firm's card receipts to be paid to the advance provider until the money is paid off.

This means that in theory at least, any business taking payments from customers via a card terminal can obtain a merchant cash advance. This finance product entails the lender working with the terminal provider so that it can ascertain how much money from credit cards typically flows through a business each month.

How simple is it to set up an MCA?

The process of setting up an MCA tends to be much easier and faster than is the case with other options, as there's relatively little that the lender actually needs to know before agreeing a loan amount and repayment plan. They will often ask for a personal guarantee and a credit check would then be done.

The underwriting process for a traditional bank loan may take weeks to gain access to finance, and in a worse-case scenario, perhaps even months. An MCA however can usually be obtained within just a few days, and the approval rates are also much higher than for traditional bank loans.

Such speed and convenience are just some of the factors that make a merchant cash advance a safer option than many otherwise more obvious sources of business funding.

What else makes a merchant cash advance a low-risk – or even no-risk – option?

Not only is a business more likely to get approved for an MCA than a bank loan – provided that it's in relatively good health and performing near expectations – but it also poses zero collateral or credit risk. It's technically considered a sales transaction rather than a loan, so it doesn't appear on a credit report. This helps to keep credit scores squeaky-clean so that other forms of business funding can be easily obtained in the future, or even alongside an MCA. Despite this, a credit check may be undertaken prior.

The even better news is that there's no collateral involved – in other words, it differs from a traditional bank loan in that it isn't backed up by something physical that would be forfeited in the event of being unable to keep up with the repayments. It's worth emphasising that an MCA works like a sales and leaseback agreement, where business's are essentially selling a percentage of their future card terminal payments.

Such factors can mean that business owners are putting their entire financial futures at risk when they take out alternative types of loan. By contrast, when you opt for an MCA, you can be confident of quickly securing crucial funds for your business, while also knowing that it doesn't pose anywhere near the same level of risk to your broader finances.

Is there anything else to know about MCAs?

Yes – in short, while merchant cash advances certainly score highly as far as safety is concerned, that very safety does also bring a few downsides that might not make it the best overall business finance option for particular situations. The amount that you can borrow with an MCA hinges greatly on turnover, so if a business wishes to borrow £5,000 but it only makes £1,000 a month, it's unlikely that it will be able to obtain this much money via an MCA.

Nor may an MCA be the most suitable option for a business if most of the revenue isn't generated through a credit card terminal. Firms that receive a large proportion of payments in other ways – such as by invoicing customers and receiving bank transfers – may be best off considering alternative types of finance first.

Nonetheless, for an extremely broad range of small to medium-sized companies, a merchant cash advance can be an invaluable means of quickly accessing the finance needed to make crucial investments at short notice and get their cash-flow back on track.