The world of business loans can be tricky to navigate. You need to figure out what amount you need, the repayment rate, the loan provider, their terms and conditions, repayment period and so much more added to that. Isn’t there an easier way to get funds for crucial financing you may need at your business?

Luckily, the answer is “yes” and it comes in the form of a merchant cash advance (MCA). But what is it and is it really worth it for your particular business? We take a closer look. 

What is a merchant cash advance?

An MCA is like a loan, although it isn’t one really. At least not in terms of the typical definition of a loan. So, what is it?

In essence, as the name implies, it’s a cash advance. This means there’s a lump sum of money that a merchant gets. But it’s not without strings attached. One of the defining features of an MCA is that the repayment happens in a particular way.

This way is specifically through a percentage of all future debit and/or credit card payments received through a merchant’s POS terminal until the fixed lump sum is paid off. 

What can you use it for?

Now that you have an idea of what an MCA is, it’s also worthwhile looking at whether it’s suitable for your particular and unique business needs. Some sources indicate that it’s ideal for retailers and those in the hospitality industries.

Others say that an MCA is ideal for smaller upfront sums which a merchant may not have access to yet, or does not wish to take out a loan for. Either way, MCAs are excellent if you want to renovate and refurbish, purchase equipment and stock, address costs of staffing, implement new technology and automations and generally use an MCA as working capital. 

What are the requirements?

Whatever you choose to use an MCA for, it’s also important to see if you qualify for one. Some of the requirements are that you need to be a UK business that’s been trading for the last six months at least, in addition to a certain minimum monthly income that you earn through your card machine. In many cases, this minimum monthly income is around £5,000, but it can be lower and will depend on your provider.

Other factors to consider are whether you’ll be required to provide a guarantor for the MCA (who will be responsible for paying off the MCA amount if your business defaults or is unable to) or offer security in the form of fixed or movable assets such as equipment, vehicles and machinery.

Advantages

Obtaining an MCA can be the right choice for your business. And here are some reasons why:

  • They are often quick to obtain (within about a week) and usually require less documentation than a typical loan.
  • In most cases, you won’t need to provide security, or what is also known as physical collateral. 
  • In the event of a slower sales period, your repayment amounts will decrease as well. This is because repayments are adjustable. 
  • The lump sum that you get can really help your business grow as you’ll be able to raise finance easier.
  • The possibility of defaulting on the loan is minimised as it’s taken directly from each of your card sales.

Disadvantages

Like almost anything in life and business, there are some reasons to be weary of MCAs, too, and you need to weigh up the pros and cons carefully. Here are some of the most important ones:

  • You might end up paying off more than you bargained for because there is a “factor” added to the payback amount. This is likely to manifest itself the most during periods of lower sales. 
  • Sometimes, the “factor” that’s added to the payback amount can be even higher than what you’d pay in interest for a loan at typical banks, online banks or financial institutions. 
  • Your annual percentage rate (also known as the total annual borrowing cost) can go into triple digits. 
  • There are no benefits to early repayments. There are no incentives or interest savings that you’d normally get from a typical small business loan.
  • Although MCAs are a good option for businesses with a poor credit score, this score can be hurt. 
  • You also face the risks of getting into a debt cycle due to the amount and frequency of repayments. 
  • The terms and conditions of the contract may be confusing and cause some complications. 

Conclusion

Whether you think that getting a business cash advance or an MCA for your business is the right choice, you’ll still be required to do your research and plan carefully. It’s advisable that you are on top of your finances to figure out what you can and cannot realistically afford to pay back.

It’s also worth knowing how many (and the value of) card payments that you’re expecting in the future in order to help you determine how quickly you’ll be able to pay off your MCA and the fixed lump sum you’d like to make use of. Weigh up the pros and cons and decide whether this option is ideal for your business needs or not.

Ultimately, you need to do what is best for your business and if there’s an urgent repair that you need to take care of with no access to a fixed lump sum in sight, then an MCA might just be the right choice for you.