As any owner of a SME will know, cash flow can be a problem in the early years. There are, of course, many options available on the table to help with this such as investment or credit. However, another route to take is what is known as a ‘merchant cash advance’, and is a common option among small businesses. We explore this in greater detail below.

What is a merchant cash advance?

A merchant cash advance is where some form of third-party lender or credit-card company funds your business based on future credit card sales from your company. This means that they are purchasing a portion of sales from your company that haven’t yet been completed. So, rather than monthly repayments, you will repay automatically by having deductions made from your daily credit card sales.

How large of a merchant cash advance can you get?

As with any loan or investment, there is a large range of merchant cash advances that you can get. This can range from a couple of thousand to six figures; what is important to remember is that the more that you are looking for, the more you will be expected to show in volume of credit card sales.

What can I use a merchant cash advance for?

You can use a merchant cash advance for whatever you see fit, whether this be the hiring of new staff, the purchasing of new equipment or advertising costs. The important thing, as with any debt, loan or investment, is to carefully think and plan beforehand about exactly why you need it and how you plan to both use it and repay it without damaging the business.

What are the advantages of having a merchant cash advance?

The advantages of having a merchant cash advance are that it can provide a quick and easy access to funds, which could be desperately needed if you are an early stage SME. They have a relatively easy approval process unlike other avenues, such as bank loans, so there should not be too many problems in this area.

Also unlike bank loans, merchant cash advances will be accepted even if you have a bad credit score, which can be extremely useful in getting your business back into a position of strength to rebuild your credit score.

They are suitable for a great number of business purposes, and unlike other forms of lending, such as investment, you will keep complete control of your business. Finally, payment terms are small and simple, with just small deductions made each day based on sales rather than large, fixed repayments.

What are the drawbacks of having a merchant cash advance?

You will find that typically the fees associated with a merchant cash advance are larger than those associated with loans. There are positives and negatives to both of these, and as loans generally take longer to be accepted, and are harder to get, you may need a quick cash injection, which merchant cash advances are perfect for.

You will also have much less flexibility to change merchant service providers should you take on a merchant cash advance, so if the relationship or deal changes further down the line you may be stuck in a situation that you do not like.

Finally, although the daily deductions may only be small, this will still be a daily hit that you take which will ultimately reduce your cash flow. The argument against this, of course, is that you may not even be able to have a cash flow without the merchant cash advance, but it is still something to consider.

How long will it take you to repay off your merchant cash advance?

Typically the average merchant cash advance will be repaid within eight or nine months. However, sometimes this may be as short as four months, or maybe even as great as eighteen months. It will entirely depend on the amount that you take out and your business model.

Is a merchant cash advance right for you?

A merchant cash advance can be a great way to boost your business. Although you will be making daily repayments, you will still be paying off less during the slower days and months. However, it is the most expensive form of financing option, so be sure to carefully consider all the alternatives before taking out a merchant cash advance.

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With a background in design, I started my career working in various UK based start ups. Branding, social media campaigns and digital design were my main strengths. Then, I dived into the business side of things. I am now a key researcher and creative content writer at CompanyFormations 24.7.