Merchant cash advance: company funding repaid from card sales

A merchant cash advance works by a provider buying an agreed amount of your company's future card takings at a discount: you receive cash now, and the provider collects a fixed total from a share of daily card sales. This is the usual process.

1. The provider reviews several months of statements to see your average card takings and how much they vary.
2. It offers an advance amount, a factor rate and a holdback percentage. Together these set the total repayable and how quickly it is likely to be collected.
3. You sign the agreement. Directors are often asked for a personal guarantee or a performance guarantee.
4. Collection is set up, either as a split at your card processor or as a variable direct debit from your bank account.
5. Funds are paid out, and the agreed share of takings goes to the provider until the total is collected.

A factor rate is a multiplier that sets the total you repay: multiply the advance by the factor rate and you have the fixed sum owed. Unlike interest, it does not grow with time, so the cost in pounds is the same whether you repay in four months or twelve.

You can see the full cost in pounds before you sign, but it cannot easily be compared with a loan interest rate, because the repayment period is not fixed. Quick repayment means a higher effective annual cost; slow repayment a lower one.

Providers set factor rates based on things such as how stable your takings are, trading history, sector and advance size.

The holdback, also called the split or retrieval rate, is the percentage of your card takings that goes to the provider. It does not change the total you repay; it changes how quickly you repay it.

A higher holdback clears the advance faster but leaves less cash each day. Check that the holdback leaves enough to cover wages, suppliers and rent in a slow week.

Split-payment collection

With a split, your card processor sends the agreed percentage straight to the provider before the rest reaches your bank account. Collection tracks sales exactly, but it may need a compatible processor.

Variable direct debit collection

With a direct debit, the provider collects an estimated amount from your bank account based on recent takings. Agreements often allow reconciliation if takings fall; ask how often and how you request it.

An MCA has no fixed term because it ends when the agreed total has been collected, and that depends on your sales. Providers usually give an estimated repayment period based on past takings, but it is an estimate, not a contract date.

A seasonal business, for example a seaside café, repays faster in summer and slower in winter without renegotiating. But if sales fall for a long time, the advance can run well beyond the estimate.

Check for any minimum collection amount, maximum period or rules on when a drop in takings counts as a breach.

The main cost is the difference between the amount advanced and the total repayable, set by the factor rate. Some providers charge other fees too, so always ask for the total you will pay in pounds, including everything.

• Factor rate cost: the advance multiplied by the factor rate, minus the advance itself.
• Arrangement or origination fees: some providers charge a fee, which may be deducted from the advance you receive.
• Processor changes: if you must switch card processor, compare the new transaction charges with your current ones.
• Breach or default charges: these may apply if you divert takings, switch processor without consent or otherwise break the agreement.

To compare with a loan, use the total cost in pounds and the likely repayment period. Our merchant cash advance calculator lets you test different takings and holdbacks.

Illustrative example only: actual costs depend on the lender and your circumstances.

A restaurant company takes an advance of £30,000 at a factor rate of 1.25, with a holdback of 10% of card takings. Its card takings average £50,000 a month.

• Total repayable: £37,500 (£30,000 × 1.25)
• Cost of the advance: £7,500
• Typical monthly repayment at £50,000 takings: £5,000 (10%)
• Estimated time to repay: 7.5 months (£37,500 ÷ £5,000)

If takings fell to £35,000 a month, repayments would drop to £3,500 and the advance would take around 10.7 months to clear. If takings rose to £75,000, repayments would be £7,500 and it would clear in 5 months. In every case the cost stays at £7,500, but the faster scenario has the higher effective annual cost, because the same charge is paid over a shorter time.

Providers usually size an advance in relation to your average monthly card takings, adjusted for how consistent those takings are. The exact approach varies by provider and by business.

Steady takings, a longer trading record and a clean history with previous advances usually support a larger offer. Sharp swings, falling sales or existing advances can reduce it.

The main risks are a high effective cost, card income tied up for longer than planned, and personal liability through guarantees. Check these points before you sign:

• Personal or performance guarantees: understand what each one covers. A performance guarantee typically applies if the company breaches the agreement, for example by diverting card takings, rather than simply because sales fall, but read the exact wording. Our guide on what a personal guarantee is explains more.
• Early settlement: whether any discount applies, and how it is worked out.
• Renewals: if a new advance is used to clear an old balance, check whether the new factor rate applies to that part too, as this can mean paying a factor cost again on the same money.
• Restrictions: many agreements stop you switching card processor, taking another advance or changing how customers pay without consent.
• Default terms: what counts as a breach.

An MCA often suits companies whose income comes mainly from card payments and varies month to month, while a term loan is often cheaper when income is steady and the company can commit to fixed repayments.

• Unsecured business loans: fixed monthly repayments over a set term, with interest that is easier to compare. Often a lower total cost for companies with stable income and a good credit record.
• Revolving credit facility: a limit you draw and repay as needed, paying interest only on what you use. It can suit recurring short-term needs.
• Working capital finance: a short-term lump sum, which may suit a known gap where you would rather leave card takings untouched.

Our guide to merchant cash advance vs business loan works through the comparison in more detail.

Possibly. Because MCA providers focus mainly on card takings, some consider companies that other lenders would decline, but each provider sets its own criteria and makes its own decision.

Providers typically want several months of consistent card takings and will check the credit history of the company and its directors. Adverse credit, low profits or a short trading period may not rule you out, but they can mean a smaller advance, a higher factor rate or a higher holdback. Lenders set their own minimum trading periods, from a few months to two or three years.

Be cautious if an advance would only be affordable by taking another soon after.

A merchant cash advance for a limited company, LLP or partnership of four or more partners is generally unregulated business finance. Consumer Credit Act protections generally do not apply, so the agreement itself sets out what happens if sales fall, if you want to settle early or if something goes wrong.

Welcome Finance is not authorised or regulated by the FCA and arranges unregulated business finance only. Read the full agreement, especially the sections on guarantees, collection, reconciliation and default, and consider independent legal or accounting advice before signing. Our guide on regulated vs unregulated business finance explains more.

We help you compare offers from suitable providers on our panel on total cost, holdback and terms. Your dedicated relationship manager, a real person, is with you by phone, email and chat from first enquiry until the provider pays out.

1. Check your eligibility in about 60 seconds, without affecting your credit score.
2. Share your card takings and processor details with your relationship manager.
3. We approach providers on our panel that are likely to consider your company. Providers run their own credit checks only after you decide to apply.
4. We set out each offer's advance, factor rate, total repayable, holdback, estimated repayment period and guarantee terms side by side.
5. Once you choose, we help you through the documents and collection set-up until funds arrive.

We do not charge you a fee. The provider pays us a commission when your finance completes. You can ask how much it is, and it can differ between providers.

Does a merchant cash advance affect my card processing fees?

It can if you must move processor. Compare the new transaction charges with your current ones.

Can I take a second advance with another provider?

Most agreements restrict this without consent, because two providers would rely on the same takings.

Do cash sales count towards a merchant cash advance?

Usually not. Providers base the advance on card and electronic takings they can collect from.

What happens if the company is sold or stops trading before the advance is repaid?

Agreements usually treat this as an event that makes the outstanding balance payable, and guarantees may then come into play. Talk to the provider early if a sale or closure is planned.

Can I get a merchant cash advance if customers pay online?

Some providers fund online card takings through payment gateways, while others focus on in-person terminals.

When can I apply for a renewal?

Some providers offer one once a set share of the current advance is repaid. Check how much would go to clearing the old balance.

Is an MCA suitable for a large, long-term investment?

It can fund a refit, but for larger, long-term investments a term loan or asset finance over a longer period may be more affordable.

Will the provider check the directors' personal credit?

Often, yes. Providers usually look at the directors' credit history as well as the company's, particularly if a personal guarantee is requested. These checks happen after you decide to apply.

What if the business closes temporarily, for example for a refurbishment?

If takings stop, repayments through a split also stop, but the agreement may require you to tell the provider in advance or may treat an unagreed closure as a breach. Agree any planned closure with the provider beforehand.