Merchant cash advance is a speedy borrowing option, which is often considered a suitable option for small businesses. Through this, you can borrow a lump sum amount, in exchange for which a percentage of your future sales goes to the lender in the form of repayments.
Its repayments are made on a daily or weekly basis through an auto-debit. It is paid from the business’s credit card, debit card sales, or bank account.
Consider Pros and Cons
As its repayment costs are high, many times they also have to struggle. It is better to know about the advantages and disadvantages of the merchant cash advance for a small business in the UK.
See both sides of a credit option, and you can decide better. After all, a debt can affect your future loan approval chances. Hence, think wisely and think twice about both benefits and disadvantages.
Pros of Merchant Cash Advance
First, let’s know about those advantages that a small business gets from a merchant cash advance.
- Fast approval process
Merchant cash advance’s eligibility requirements and application process are very fast. It provides you with funds within 24 hours to 72 hours. For those businesses that have urgent financial needs, it works to provide instant capital.
Along with this, because of minimal paperwork, a merchant cash advance is also a good option for small businesses. In fact, if you apply through a private online lender, then there is zero paperwork. The entire application procedure is digitized.
Easy eligibility requirements
The biggest condition for MCA is stable card sales. Apart from this, its qualification requirements are quite easy. Instead of your business’s credit score, funds are approved on the basis of the business’s revenue.
This is the reason that lenders also accept businesses with poor credit history. Along with this, those startups that have a consistent income can also avail themselves of MCA through stable revenue.
In this, there is no need for collateral or a guarantor. It is required only when a business’s repayment capacity is weak, and it has an urgent requirement for funds.
- Flexible repayment structure
Merchant cash advance repayments are flexible. In the case of high business revenue, lenders deduct bigger repayment amounts, whereas during slow revenue periods, the repayment amount also becomes smaller.
Business owners do not have the stress of paying a fixed instalment amount. They can borrow funds at any time as needed for working capital. However, having a repayment strategy is a better way to borrow safely.
- No fixed use restriction
Funds availed through MCA can be used for any commercial purpose. There is no restriction of any kind in this. Funds can be used for staff salaries, rent payments, inventory, purchase, advertising campaigns, working capital needs, equipment repair, expansion projects, or any purpose.
This one feature makes Merchant Cash Advance one of the most sought-after credit options. A lender may not ask about your purposes. But it is good to be clear about that. This prevents the urge to overborrow.
Cons of Merchant Cash Advance
After knowing the pros, let’s talk about the disadvantages of MCA. If you want to take an informed and rational borrowing decision, then it is important for you to know both sides of the coin.
- Higher overall cost
Merchant cash advance offers funds on an instant basis. This is the reason that it is much more expensive than traditional business loans. Because of this, the total repayment amount can be quite high.
For a small business, this product can be helpful, as well as become the reason for a debt trap. Therefore, if you are considering MCA, then do not avoid its cost factor. Before applying for MCA, definitely take an estimate of its full repayment cost.
- Can affect cash flow
MCA repayments are flexible. When the business earns more, the repayment amount increases. And during slow revenue periods, the repayment amount is reduced. This is a positive factor. But at the same time, it also comes as a disadvantage.
For those small businesses that need smooth cash flow, a big part of their revenue is deducted in the form of repayment. In such conditions, small businesses can struggle because of poor cash flow.
During the slow sales period, this can increase your financial stress even more. Not only this, but because of this, it becomes difficult for you to manage the daily operating expenses of the business.
- Daily and weekly payments
MCA repayments are usually of two types: daily and weekly payments. Because of this, whatever profit or revenue the business earns, a major part of it goes to the lenders in the form of repayment.
In that case, small businesses are not able to become financially stable. Apart from repayments, there are many other expenses that have to be managed on a daily basis.
But because of the auto debit system, business owners are not able to make repayments on their own terms. Because of this, in the future, there can again be a scarcity of working capital.
- Short repayment period
This credit option is specifically designed only for short-term needs. For example, to compensate for working capital or a cash flow gap, small businesses avail funds through a merchant cash advance.
But because it has high-cost repayments, in such a situation, paying back within a short repayment period can be difficult for you. However, because of this, you can completely pay off the MCA debt in a short time.
However, at the same time, if you need funds to operate the business at the current time, then because of the hefty repayments of the short-term period, you struggle financially.
Hence, it is clear that….
After the comparative study of the above-given pros and cons, it becomes easier for you to take a rational borrowing decision. Every credit option has its own advantages and disadvantages. MCA can be a good option for working capital loans in the UK. But at the same time, its high cost is a big concern for a small business.
In the case of strong repayment capacity, every credit option is suitable for you. But if cash flow management is poor or your repayment ability is weaker, a merchant cash advance requires careful decision-making.
Especially if your business has a poor credit situation, in that case, make a strong repayment budget plan. Before availing any kind of credit option, you should think about all the aspects.
Frequently Asked Questions
1. Is a merchant cash advance available for seasonal businesses?
Yes, it is. Any business type with provable, stable business earnings can apply for a merchant cash advance.
2. Can I apply for another merchant cash advance before repaying the current one?
This may be possible considering the repayment record of your current MCA debt. Pay instalments on time, and you may get another merchant cash advance.
3. Does a merchant cash advance require a long business operating history?
No, it does not need a long trading history. In fact, it is available for start-ups that usually have a shorter operating record.
Harry Kane is a financial writer and author who has covered wide topics related to business loans and finance for the last decade. He has been working as the Chief Contributor in finding out deals on various business finance products covered by Thebusinessfunds, a reputed business loan broker firm in the UK. The primary work of Harry is to analyse the loan requirements of various businesses according to their circumstances and affordability. He directly communicates with the loan aspirants and guides them to get the right loan matching their needs. He has a vast experience in finance writing, working with many major business firms in the UK. At Thebusinessfunds, Harry also used to write well-researched blogs covering the financial problems of business loan aspirants and providing relevant solutions. He is a postgraduate with MSc. in Banking and Finance.
