Blog Article by Response Business Finance
What Is a Merchant Cash Advance and How Does It Work?
Need cash fast but don’t want to wait weeks for a traditional loan? A merchant cash advance (MCA) could get you funded in days, not months. But before you jump in, here’s what you need to know about how it works and whether it’s right for your business.
What Is a Merchant Cash Advance?
A merchant cash advance isn’t actually a loan. It’s an advance on your future card sales. The provider gives you a lump sum upfront, then takes a percentage of your daily card transactions until they’ve collected the full amount plus fees.
Think of it like this: if you normally take £10,000 in card payments each week, an MCA provider might advance you £30,000 today and then collect 15% of your daily card sales until you’ve paid back around £36,000 to £42,000 (depending on the factor rate).
How Does a Merchant Cash Advance Work?
The process is surprisingly straightforward:
1. You Apply
Most MCA providers only need basic business information and 3-6 months of bank statements or card processing statements.
2. They Assess Your Card Sales
The provider looks at your average monthly card sales to determine how much they’ll advance and at what rate.
3. You Get Funded
If approved, you typically receive funds within 1-3 business days.
4. Automatic Repayment
The provider connects to your card processor and automatically takes their percentage from each card transaction. No fixed monthly payments to remember.
5. Repayment Varies with Sales
Busy week? You’ll pay more. Quiet period? Payments automatically reduce. The repayment amount follows your cash flow.
How Much Does a Merchant Cash Advance Cost?
MCAs don’t use interest rates like traditional loans. Instead, they use something called a “factor rate” – typically between 1.1 and 1.5.
Here’s how it works:
The equivalent APR often works out between 20% and 100%+ depending on how quickly you repay it. Fast repayment means higher effective rates.
Who Qualifies for a Merchant Cash Advance?
MCA providers are generally more flexible than banks:
You don’t need perfect credit or extensive paperwork. The main requirement is consistent card sales.
Pros and Cons of Merchant Cash Advances
| Advantages of MCA | Disadvantages of MCA |
|---|---|
| Fast funding (1-3 days) | Higher cost than traditional loans |
| No fixed monthly payments | Only works if you take card payments |
| Payments adjust with your sales | Can create cash flow pressure during busy periods |
| Available with poor credit | Short repayment terms (typically 6-18 months) |
| Minimal paperwork |
When Does a Merchant Cash Advance Make Sense?
MCAs work best for:
Merchant Cash Advance vs Traditional Business Loans
The key difference is flexibility versus cost. MCAs offer speed and flexibility but at a premium price. Traditional loans take longer but cost less.
If you’re weighing up your options, our guide on Merchant Cash Advance vs Business Loan: Key Differences Explained breaks down exactly when each option makes sense for different business situations.
Is a Merchant Cash Advance Right for Your Business?
Ask yourself:
If you answered yes to most of these, an MCA might work for you.
The application process is usually quick:
1. Gather your paperwork:
Bank statements, processing statements, basic business info
2. Compare providers:
Factor rates and terms vary significantly
3. Submit your application:
Most can be done online
4. Review the offer:
Check the total repayment amount and daily collection percentage
5. Get funded:
Funds typically arrive within 1-3 business days
Making the Right Choice
A merchant cash advance can be a lifeline when you need fast funding and have strong card sales. But it’s not cheap money. Make sure you understand the total cost and have a clear plan for how the funding will improve your business.
The key is matching the right funding to your specific situation. Whether that’s an MCA, traditional loan, or another option depends on your timing, credit situation, and business model.
If you’re unsure which finance option suits your business best, we’ll help you weigh up your options. Fast, FCA-regulated advice tailored to your specific needs – because every business is different.
Mark Squires
Managing Director
Mark Squires is a seasoned professional with a passion for transforming how businesses access finance. As the founder of Response Business Finance (RBF), Mark leads a boutique commercial brokerage built on the principles of sensibility, ethics, and proactivity. His vision is simple yet profound: to make commercial finance personal, offering tailored solutions that empower SMEs to thrive.
