Merchant cash advance

A merchant cash advance gives you a lump sum now in exchange for a share of your future card takings until a fixed total has been repaid. The total is set by a factor rate, so the cost in pounds is fixed from the start, and the sooner you pay it back, the higher the cost works out as a yearly rate. It suits businesses that take most of their sales by card and have uneven months.

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How a merchant cash advance works

The provider looks at your card takings over recent months and offers an advance, say £30,000. It sets a factor rate, say 1.25, which fixes the total you will repay: £30,000 × 1.25 = £37,500. It also sets a split: the percentage of each day’s card takings that goes to the provider until the £37,500 has been paid.

Repayment comes out of your card takings automatically. Either your card payment provider sends the split straight to the advance provider before paying you the rest, or the provider collects a matching amount from your bank account each day or each week. On a busy day you repay more and on a quiet day less. There is no interest rate, and the date the advance is cleared depends on your takings.

Because the provider is paid from your takings, it lends against the card sales record of the business more than its accounts, and it can fund businesses with short or patchy filed accounts. Turned into a yearly rate, the cost is higher than a bank loan would charge a business with a strong record.

Card-taking businesses use it: restaurants and cafes, pubs, shops, salons, gyms and online sellers. For more on those trades see restaurants and cafes, retailers and hair and beauty salons.

Turning a factor rate into a cost you can compare

Illustrative example

A £30,000 advance at an assumed factor rate of 1.25, repaid through an assumed split of 15% of card takings. The business takes £40,000 a month on cards. The factor rate and split are assumptions for the arithmetic: each provider sets its own.

Total to repay (£30,000 × 1.25)
£37,500
Cost in pounds
£7,500
Repaid each month (15% of £40,000)
£6,000
Time to repay (£37,500 ÷ £6,000)
6.25 months
Monthly rate implied by those repayments
6.51%
Equivalent yearly rate, compounded monthly
113.2%

A factor rate of 1.25 reads like 25%. It is 25% of the advance however long repayment takes, so the shorter the time, the higher the yearly cost. The figures above treat the repayments as monthly; daily repayments give a slightly different answer. More on what a factor rate is, and the merchant cash advance calculator runs this sum on your own takings.

The same advance at different card takings

£40,000 a month£25,000 a month£15,000 a month
Repaid each month at a 15% split£6,000£3,750£2,250
Months to repay £37,5006.251016.7
Cost in pounds£7,500£7,500£7,500
Equivalent yearly rate113.2%65.3%36.8%

The cost in pounds is the same in every column. The yearly rate falls as takings fall because you have the money for longer. A business that expects busy months should compare the advance with a loan on the yearly rate, because busy months are when the advance costs the most.

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Who a merchant cash advance suits

It suits a business that takes most of its sales by card, has at least several months of card history, and has takings that swing: a seaside cafe with a strong summer, a shop with a December peak, a salon whose diary fills unevenly. In a quiet month the repayments shrink with the takings, which a fixed loan repayment does not do.

It also suits a business that cannot get a bank loan because its accounts are young or show a weak year, but whose card takings are steady. The provider is lending against those takings, so a good record of card sales counts for more than last year’s profit.

It suits a business badly if its margins are thin. Taking 15% of every card sale for months can leave too little to pay suppliers and staff. Before you sign, work out your takings after the split and check you can still cover your costs in your quietest month.

What to check in the agreement

Check whether the split is a true percentage of takings or a fixed daily or weekly sum collected from your bank account. A fixed sum takes the same amount in a quiet week as in a busy one, so it behaves like a loan repayment. Some agreements combine the two, with a percentage and a minimum each month.

Check what happens if you repay early. The factor rate fixes the total, so paying off sooner saves money only if the agreement offers a discount for early settlement. Ask for that in writing before you sign.

Check what counts as a breach. Agreements can require you to keep your card terminal with a named provider, to keep taking card payments in the usual way and to keep customers paying by card. Breaking those terms can make the whole balance due at once. Providers may ask directors of a limited company for a personal guarantee that the business will keep to the terms: read what a personal guarantee means before signing.

Check how a renewal works. Providers offer a fresh advance once part of the first has been repaid, and the new advance pays off the old balance. The factor rate applies to the new advance in full, including the part that pays off the old one, so a renewal can mean paying the factor on the same money twice.

Merchant cash advance or a business loan

A £30,000 loan repaid over twelve months at an assumed 15% a year costs £2,492.99 in interest, with fixed payments of £2,707.75 a month. The advance in the example costs £7,500 whatever happens. The loan costs less in pounds and gives you a fixed plan. The advance adjusts to your takings and may be available when the loan is refused.

If you can get a loan or an overdraft on reasonable terms, it is likely to cost less. If you cannot, or if your takings swing so much that a fixed repayment would leave you short in the quiet months, price the advance. A funding search through Swoop shows loans and advances side by side for the same business.

The funding search is for limited companies and LLPs, and for sole traders and partnerships borrowing more than £25,000. A sole trader or small partnership needing £25,000 or less should speak to their own bank or look at the government’s Start Up Loans scheme.

Merchant cash advance calculator

Converts a merchant cash advance factor rate into the total you repay and an approximate yearly cost.

Open the calculator

Questions people ask

What is a merchant cash advance?

It is a lump sum paid to a business in exchange for a share of its future card takings. The provider takes an agreed percentage of each day’s card sales until a fixed total, set by a factor rate, has been repaid. Repayments rise and fall with your takings, and the total cost in pounds is fixed at the start.

How do I work out the cost of a merchant cash advance?

Multiply the advance by the factor rate to get the total you repay, and subtract the advance to get the cost in pounds. Then work out how long repayment will take: the total divided by the split percentage of your monthly card takings. Turning that cost and time into a yearly rate lets you compare it with a loan, and it rises the sooner you repay.

What is a split on a merchant cash advance?

The split is the percentage of each day’s card takings that goes towards repaying the advance. It is set by the provider for your business. A higher split repays the advance sooner, which raises the yearly cost, and leaves you less of each sale to run the business. Check whether the agreement also sets a minimum monthly amount.

Can I repay a merchant cash advance early?

You can, but the total is fixed by the factor rate, so early repayment saves money only if the agreement gives a discount for settling early. Ask the provider for the settlement terms in writing before you sign, and check how a renewal treats any balance still owed on the first advance.

Do I need good credit for a merchant cash advance?

Providers look mainly at your card takings: how much, how steady and for how long. Your credit file and your directors’ files are checked too, but a record of card sales can count for more than a weak year in the accounts. Expect to be asked for a personal guarantee that you will keep to the terms.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Working capital

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

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