Small businesses and cash advance loans

Merchant cash advances (MCAs) or business cash advances (BCAs) as they are also known, are increasingly being mentioned as a means of supporting the cash-flows of small businesses. So, in what circumstances may it be worth a business pursuing an MCA, and what could it help them to achieve?

An emerging alternative to the traditional bank loan

With reports indicating that net bank lending to small businesses has seen a sizeable drop in recent times – from £3 billion in 2016 to just £700 million last year – there's a good chance that if your business requires more resources but has turned to a bank for a loan, you have been turned down.

Even if you do secure a bank loan, the due diligence required before the money is released to you can be painfully slow. Cash advance loans have turned the small business finance world on its head somewhat by making funding available to businesses much sooner after their application, and with less stress caused to the business owner.

What kind of 'loan' is a cash advance loan?

It is important to recognise that the term 'cash advance loan' is something of a misnomer, as this particular funding solution isn't technically a loan at all. The provider of an MCA doesn't need to take any collateral as security, for example, and nor is a personal guarantee necessary.

Instead, you effectively pay back such an advance through your business's card payments, which is why MCAs are especially strongly recommended to firms that make heavy use of debit and credit card terminals for accepting payments from customers or clients.

The way it works is that you receive your advance and as well as paying an agreed upfront cost, you pay back the amount as a small percentage of your future card payments. Unlike the situation with a traditional loan, there's no APR or fixed monthly payments.

If, for instance, you agree to a £10,000 advance for a £2,000 upfront cost with a 15% payment percentage, £12,000 is the amount that you'll ultimately repay. The 15% percentage isn't a reference to interest, but instead to the percentage of each debit or credit card transaction that goes to the MCA provider, continuing through all of your transactions until the total amount is paid off.

This means that if a given card transaction is £100, £85 will go to you, and £15 to the MCA provider. But if you have a slower month and your average card transaction is closer to £50, only £7.50 of that will go to the MCA provider, so you'll get to keep £42.50. This helps to make a cash advance loan a manageable type of 'loan' to repay over time.

So, in what specific circumstances could an MCA be beneficial?

Let's imagine, for example, that you own a restaurant and a major road leading to your business premises is flooded for a few weeks. Customers are temporarily kept at bay, but you still need to keep paying your staff in the meantime. A business cash advance could enable you to recover during the months after the flood in which your level of takings returns to normal.

Alternatively, you might be selling a product on a business-to-business (B2B) basis, and receive feedback from prospective customers that they would like a certain feature included that is absent from the present solution. You could always secure the funds needed to update the product through an MCA, in the knowledge that the heightened sales, as a result, will enable you to easily pay back the money through your credit or debit card transactions.

Other potential uses of an MCA include for adding a new product or service to your business's range if it has suddenly become popular among your target customers, or holding a glitzy event that would enable you to boost awareness and drive sales – again, as will help you to repay the advance.

In short, cash advance loans – or merchant cash advances, or business cash advances – can be suitable in various contexts when your business is in need of a flexible and manageable form of finance. So, why not enquire about the MCAs that we are proud to offer here at Choice Business Loans, to see just how much your own company could borrow?