Since Covid-19, mainstream banks are not as supportive towards sectors such as retail, hospitality and leisure. This leaves a gap in terms of funding availability for those operating in those industries, particularly small business owners. Historically, banks would support with overdrafts. However, these days they are few and far between. Several lenders have identified this gap in the market, choosing to build a product to support businesses in this space – a merchant cash advance.
What is a cash advance?
Designed to provide businesses with quick access to working capital, a cash advance allows businesses to borrow against their future card sales. Lenders will evaluate the average monthly revenue generated through card transactions and offers a loan amount, typically up to 1.5 times the monthly revenue. For instance, if your business is generating £125,000 in monthly card sales, you could potentially borrow up to £200,000.
To be eligible for a cash advance, your business must be:
- Take card or electronic payments (either through a card terminal or e-commerce platform)
- Trading for at least 3 months
- Taking minimum monthly card sales of £1,500
- A limited company
How does a cash advance work?
The repayment process is tied directly to your business’s revenue stream. A percentage, often around 20%, is deducted from each card transaction until the loan is repaid. For example, if a customer spends £10, the lender would take £2, while the business retains £8. This flexible repayment structure allows businesses to pay more when sales are high and less during slower periods, reducing the pressure of fixed monthly repayments.
A merchant cash advance is linked directly to your business’s card terminal; whether it’s a physical terminal that can be accessed via a bricks and mortar site, or an online payment system such as an ecommerce website. A cash advance can also cater to businesses with more unconventional revenue streams, such as vending machines and online business platforms such as Squarespace and Shopify.
How long does it take to repay a cash advance?
On average, it usually takes businesses around 12-18 months to repay the advance, however when 50% of the facility has been repaid, you will become eligible to renew your cash advance facility and inject your business with additional working capital. 80% of PMD customers who use a cash advance go on to renew their facility when they can do so.
Quickly access funds
Many small business owners find cash advance facilities appealing as they enable quick access to working capital that otherwise may not have been accessible. On average, an approval can be granted within one hour, with funds released within 24 hours. This rapid turnaround is particularly beneficial for businesses who may face time-sensitive growth opportunities, cashflow issues or need to cover unexpected expenses.
Make payments in line with your sales
Unlike traditional loans and other forms of funding, there’s no fixed repayment schedule with a cash advance, as repayments fluctuate with revenue. This eases burdens during quieter months, as you’ll still only pay a percentage of your card sales, no matter how busy you are.
Is any additional security required for a cash advance?
The loan is secured against your future card sales, meaning there’s no need for property as security, making it a viable funding solution for businesses with steady card sales but limited access to traditional financing. You will still be required to provide a personal guarantee. Lenders will primarily focus on your card sales history as opposed to credit scores or financial performance. This is one of the reasons why the application process and turnaround is so fast.
What can a cash advance be used for?
You can use your cash advance for pretty much anything, as long as it’s a legitimate business reason. This can include stock acquisition, working capital and expansion. You can also use the facility for any intangible elements of refurbishments and fit outs. This includes professional fees and surveying costs. Any tangible assets would be better placed within an asset finance facility. You can use this in conjunction with a cash advance, allowing you to purchase capital equipment without large upfront costs.
In short…
A cash advance provides business owners with flexible, revenue-based financing when high street banks cannot. With minimal requirements and rapid approval times, it’s a practical alternative to a traditional loan. For more information on how to secure this type of facility or understand what other funding options are available for your business, get in touch with us today. PMD house an expert team of finance specialists who will take the time to understand your business, its future plans and how commercial finance may fit in.