Merchant cash advances, shortened to MCAs, are often seen as a quick solution for businesses looking for short-term funding that deal with a high volume of card payments.
And, for the right businesses, an MCA can provide access to working capital minus the long application processes that are sometimes associated with traditional lending.
Here, we’ll explain:
- What a cash merchant advance is
- How repayment works
- What it costs and who it suits
- The things to look out for before you sign
We’ll also cover other funding alternatives so that you can choose a funding option that supports your cash flow.
What Is a Merchant Cash Advance?
A merchant cash advance is a type of short-term business funding option that is repaid using a percentage of future card sales. A lump sum is received up front, and then repayments are automatically taken as a fixed share of daily or periodic card takings until the agreed total is fully repaid.
They are aimed at businesses that deal with consistent card transactions because the provider underwrites them based on recent sales performance as opposed to traditional affordability tests.
MCAs don’t require property or physical assets as collateral, unlike traditional secured loans. However, contracts may still include personal guarantees and other protections.
A key feature of an MCA is that repayments are linked to sales volumes, which can be helpful for businesses that rely on seasonal sales.
How Does It Work?
An MCA process begins when a provider reviews recent card sales and trading history. They use this insight to estimate how much your business can reasonably repay through future card takings.
The business will receive the approved amount and agree to two main terms:
- The total payback amount plus fees.
- The “holdback” percentage is taken from card sales.
Rather than paying fixed monthly instalments, the business will repay a percentage of card transactions as they happen, meaning repayments increase or decrease according to revenue.
So, when sales are strong, the repayments are made faster because the provider is taking a larger amount each day. This structure can help businesses avoid strict repayment schedules during quieter periods, but it also means that MCA applicants need to be confident that these payments won’t affect the business’s day-to-day cash flow.
How Much Does a Merchant Cash Advance Cost?
Factor rates and fixed fees
MCAs are often priced using a factor rate rather than a traditional interest rate. This quirk can make the true cost harder to understand upon first inspection.
The factor rate is often expressed as a decimal and determines the total amount that needs to be repaid.
For example, if you take a £50,000 advance with a 1.3 factor rate, the total repayment will be £65,000, plus any additional arrangements or service fees.
Why the “effective cost” can be higher than it looks
The quicker a business repays an MCA, the higher the effective annualised cost can appear because the fee is concentrated into a shorter period.
This feature makes it so important to compare options based on the total repayable amount and the likely time it will take to repay. A practical way to evaluate an MCA is to model scenarios (best and worst case) so that the business applying can confirm it’s still able to pay wages, rent, utilities, etc, alongside the deductions.
What Types of Businesses Are MCAs Most Suitable For?
MCAs tend to suit businesses that process a large proportion of revenue through card payments and have reasonably predictable transaction volume.
Retail and hospitality businesses are common examples of those that benefit from MCAs because they have frequent card transactions and short cash conversion cycles. Service businesses that also take card payments can also use MCAs with relative confidence, provided margins are healthy enough to absorb the payments.
MCAs can be hard to access for new, start-up businesses because underwriting relies heavily on historic card sales as opposed to future projections.
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Pros and Cons of Merchant Cash Advances -
Potential benefits |
Key drawbacks and risks |
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They are fast to apply for and can provide access to capital when a business needs it for replacing broken equipment or a marketing campaign. |
An MCA can be expensive compared to other forms of finance, and the pricing format can make it difficult to understand without proper modelling. |
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Repayments are linked to sales, meaning they are flexible. This can feel more manageable during seasonal dips. |
Deductions happen frequently, which can put pressure on working capital, especially if costs rise or sales slump. |
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An MCA may be more suited for businesses that struggle with traditional bank loan criteria because providers tend to focus on sales performance. |
There is often little benefit to early repayment because fees are often fixed, meaning you can end up paying the same even if you clear the balance. |
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Businesses should exercise caution about signing contracts, as they can include terms which are easy to miss. |
What to Watch for in an MCA Contract
A key thing to check is whether the agreements include minimum payment clauses that can reduce the flexibility benefit if repayments don’t meaningfully drop when sales fall.
Some providers also restrict how you can route payments and may require you to process card transactions through a specific system, which can limit operational freedom.
Businesses should also understand what counts as a breach and what the consequences are if the contract discourages you from shifting customers to cash or other payment routes.
Additional set-up charges, service fees, or penalties should also be looked out for, and the total repayable amount should be laid out in writing and be clearly identifiable.
Finally, if personal guarantees are involved, it's important to understand the personal risk being taken on.
Alternatives to Merchant Cash Advances (And When They Might Fit Better)
A business loan may be a better fit if a business needs finance but wants clearer pricing and more predictable repayments. A loan can be better for planned investments (upgrades to machinery, for example) rather than plugging urgent cash flow gaps.
Opening up a line of credit can also provide flexible access to funds, which can be more cost-effective for ongoing working capital requirements. Invoice finance can suit businesses which sell on credit terms and have cash tied up in receivables because it unlocks funds from unpaid invoices rather than relying on upcoming card sales.
If funding is being used for a specific piece of equipment, asset finance is more of a targeted option. Asset finance protects working capital and ensures the asset is in place, working for the business without draining cash flow.
Typically, the right option comes down to what a business wants to fund and how quickly they need the capital.
MCAs Can Be Useful, But Only With Clear Eyes
As we’ve seen, a merchant cash advance can be a practical tool for businesses that have strong card sales and need fast, short-term funding.
One of the main risks is that businesses overlook the true cost of an MCA and the impact it can have on cash flow. The safest approach is to model repayments against different scenarios and to carefully read the terms.
In instances where funding is needed for equipment or assets, structured options from firms such as Shire Funding may provide a more sustainable solution.
Discover how we can help by speaking to our team.
This article is provided for general information purposes only and is intended for UK business customers. It does not constitute financial advice, and finance is subject to status and approval.