If your revenue is inconsistent and your business is heavily influenced by seasonality, standard business loans may not be the most suitable funding solution. That’s why alternative finance solutions, such as merchant cash advances, are increasingly popular, especially among retailers and hospitality companies. 

We explore the benefits of merchant cash advances, how they work and how they compare with other business finance options.

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What is a merchant cash advance?

A merchant cash advance, also known as a business cash advance, is a short-term funding option that aligns with your seasonal cash flow. While most business loans come with fixed monthly payments (plus interest), a merchant cash advance involves repaying capital as a percentage of future card sales. 

This form of revenue-based finance is ideal for businesses that get a lot of sales coming through card terminals and is popular with retailers, restaurants, hotels and various digital companies.

Main benefits of merchant cash advances for businesses 

• Fast access to working capital
• Capital repayments are aligned with future card sales, meaning cash flow is less affected in slow sales periods and off-seasons
• Reduced finance burden compared with traditional forms of debt finance
• A good way for growing businesses to build credit history and improve scores

However, it’s worth considering that merchant cash advances often have stricter terms and higher fees for using the facility compared with other business finance solutions.

How does a merchant cash advance work?

With a merchant cash advance, providers give businesses a lump sum payment to be paid as a set percentage of future card sales. Lenders will review your past card sales, trading history, cash flow and other influencing factors before agreeing to an advance and the percentage to be repaid periodically. Then, they will provide an upfront payment of working capital to use for various operational needs.

Your business will pay a set percentage of its card sales every month to the lender until you’ve repaid the initial amount, plus ‘factor fees’ and any other service fees the provider requires. We’ll explain factor fees in the next section.

Using a merchant cash advance allows you to tie your loan repayments to your sales, meaning when sales are good, your repayments will rise, but if sales drop, they’ll fall – but unlike other debt finance, you’re not out of pocket in slow periods. 

For some businesses, this is a great safety net and a way to address potential cash flow problems.

How much does a merchant cash advance cost?

The amount you’ll pay back and the time you have to pay it in a merchant cash advance are determined by the factor fee (or funding fee) and split percentage. 

The factor fee is a fixed cost rate you'll agree with your provider (typically between 1.2 and 1.5) of the amount of capital offered to the borrowing business. Unlike with interest on a loan, you can’t save yourself money by repaying the loan early, like you can with digital lenders like iwoca.

In addition to this fixed factor fee, finance providers may require other fees, such as a set-up charge for the facility. Carefully read terms and look out for extra charges before entering an agreement with a merchant cash advance broker or lender.

The repayment percentage doesn’t add to the cost, but it does influence how long it takes to pay back the capital advance. 

An example of a merchant cash advance in practice

Take the example of a restaurant owner who needs funds to renovate their establishment. They apply for a merchant cash advance and provide their credit card sales data for the past six months. Based on their average sales, the lender determines they are eligible for a £50,000 advance.

The lender agrees to a repayment percentage of 10% of the restaurant's daily credit card sales until the full amount (plus fees) is repaid. This allows the restaurant owner to complete the renovations and pay back the advance gradually as they generate revenue.

If the lender agrees to a factor rate of 1.2, this means the total cost of the advance is £60,000. This doesn't change, regardless of whether it takes three, six or nine months to repay the amount borrowed. The total cost may be slightly more if there are any set-up costs or other charges beyond the factor fee.

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How long does it take to repay a merchant cash advance?

This is dependent on what percentage of your card sales you’re handing to your provider per month (the split percentage). If the split is 10% and you make £20,000 in card sales each month, you’ll be paying back your provider £2,000 a month until you’ve repaid your merchant cash advance.

Split percentages vary depending on different providers, but generally range between 10% and 30%. Research has shown that most customers repay their merchant cash advance in around six months. Many providers, such as PayPal (and its working capital advances), offer you lower fees if you agree to higher split percentages.

If your circumstances change and you’d like to repay the full amount owed early, it may incur an early repayment charge, depending on the finance provider. 

How to refinance a merchant cash advance

If a business is struggling to repay its merchant cash advance, there may be an option to refinance the loan. Refinancing involves obtaining a new loan to pay off the advance borrowed. Businesses can benefit from lower interest rates, longer repayment terms, or more manageable payment amounts. 

If you want to refinance a merchant cash advance, research and compare different lenders' terms to find the best option for your financial needs.

Merchant cash advance direct lenders vs brokers: which option is best?

Businesses seeking revenue-based funding can explore merchant cash advance brokers or direct lenders to find a suitable agreement. Below, we outline the pros and cons of each approach: 

Using a merchant cash advance broker

Pros:

• Exposing you to a larger pool of lenders
• Saving you time on research and lender comparison
• Getting support and guidance from industry experts

Cons:

• Broker fees apply
• Brokers are incentivised to achieve commission in addition to finding you the right deal

Using a direct lender

Pros:

• Faster ways to access funds, without using an intermediary
• Saves you paying broker fees

Cons:

• Time-consuming for finding suitable solutions, comparing lender terms and calculating costs
• You may not find the best or most cost-efficient solution without the support of a broker and their expertise and lender network

Applying for a merchant cash advance

Getting a merchant cash advance is typically far quicker and simpler than getting a bank loan. You won’t have to hand over a business plan, and most providers will approve a company in days rather than weeks (which can be the case for loans from high street banks).

You can apply for a merchant cash advance directly via lender websites or negotiate with brokers and lenders over the phone to find a suitable agreement. Lenders will typically require the following information when assessing applications and deciding on terms:

• Monthly sales volumes – typically, the higher your monthly sales, the larger sums you can borrow (with lenders setting a minimum historic monthly sales volume).
• Trading history – the time you’ve been trading can influence your eligibility, rates offered and the capital amount you can borrow.
• Industry type – certain industries deemed higher risk may put off some lenders from approving an advance.
• Average transaction size – lenders usually prefer higher frequency of transactions to less frequent but bigger sales amounts.
• Existing debt and creditworthiness – while lenders may not overly focus on your credit score, they will want to know your existing credit facilities and current debt levels.
• Recent bank statements and financial reports – due to the importance of card sale volumes, lenders will take into account your recent financial records to determine what they can offer your business.   

It’s also worth noting that merchant cash advance contracts often have strict terms, with providers keen for businesses not to disrupt card sales, such as incentives/promotions for customers paying with cash. Plus, they may request that you stop using other forms of credit. So, read the terms carefully for each prospective lender.

Can you get a merchant cash advance without a credit check?

Most merchant cash advance providers will conduct soft checks, which don’t affect your credit score. Unlike a lot of other forms of business finance, revenue-based funding lenders are more concerned with your revenue and card sales than your credit score. So, if your sales are healthy, then you have a good chance of getting approved.

Are there merchant cash advances for start-ups?

It’s possible, but uncommon. Most merchant cash advance providers in the UK don’t fund start-ups with less than 3–6 months of trading, as approvals are largely based on historic card sales, so lenders want to see proof of strong sales over a significant period.

How does a merchant cash advance compare to a business loan?

The main difference between a merchant cash advance and a business loan is in how the funds provided are repaid. Most business loans require companies to repay the capital over a set of monthly instalments, plus either fixed or variable interest on the money owed. In a merchant cash advance agreement, repayments are based on a percentage of daily, weekly or monthly card sales, meaning the amount repaid from month to month can vary significantly.

Both types of business finance can help ease cash flow, but revenue-based funding is directly aligned with business performance, which suits businesses with inconsistent cash flow and seasonal demand variation.

As mentioned earlier, instead of interest rates, merchant cash advances have factor rates, which, once agreed, are fixed for the length of the agreement. 

Alternatives to merchant cash advances

If you don’t have the required trading history or you’re not sure whether you want to have repayments tied to your future card sales, consider the following alternatives to merchant cash advances:

• Line of credit: Using a business line of credit offers a sum of capital to draw from, when required, with options to top up.
• Business overdrafts: Seen more as a safety net for businesses, overdrafts can provide timely credit with set limits to dip into and repay periodically.
• Invoice finance: This form of business finance unlocks funds tied up in late or pending client invoices to plug cash flow gaps and invest in growth.
• Small business loan: Flexible loans for small businesses are usually unsecured, meaning no business assets are required as collateral, offering fast access to working capital and manageable monthly repayments.

Iwoca is a leading flexible business loan provider for UK SMEs. Our finance solutions are tailored to the needs of growing businesses. You can borrow between £1,000 and £1 million for days, weeks or up to 60 months.

It’s quick and easy to apply, and you can expect funding decisions within 24 hours, with the funds often released the same day. Plus, you only pay interest on the funds you draw down, and we don't charge for early repayment. 

Learn more about iwoca’s Flexi-Loans and use our business loan calculator to see your likely monthly repayments.