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Business Cash Advance explained

The advantages and disadvantages of choosing this flexible finance solution to fund your small business

As a relatively new product for the UK market, Business Cash Advance (sometimes known as Merchant Cash Advance) is providing thousands of small businesses with a short term cashflow solution.

The basic principle is that you receive a cash advance between the value of £10,000 to £100,000 which is paid back as your customers buy your goods or services through card payments. These cash advances are often used to make investments for growth as they are usually quicker and easier to secure than a bank loan. The percentage that you will pay back via each transaction is decided between you and your lender but typically it will be around 20% of the value of each card transaction you take that goes towards paying back the cash you were provided with.

The requirements of Business Cash Advance

In order to qualify for Business Cash Advance you need to be using a PDQ (Process Data Quickly) Terminal for credit and debit card payments. Lenders will also usually require:

  • A minimum of twelve months trading statements through your PDQ
  • A minimum of £3,500 average customer spend per month through card payments.

Other than these requirements, Business Cash Advance offers a fairly easy to secure loan for many small businesses as opposed to your typical bank loan or overdraft. It must be noted that some lenders also require statements such as rent payments for credit assurance. However, the paperwork required is still usually much less invasive than a full credit check.

How does Business Cash Advance work?

Once you have qualified for a loan, you will often be given up to 85% of an average month’s income as the ‘cash advance’.  For example, if you earned a total of £144,000 turnover last year from customer card sales, it works out at an average of £12,000 per month. You will then be able to receive around £10,000 as the cash advance (roughly!). The repayment of this cash advance is taken as an agreed percentage of each customer transaction that takes place in your store or business by card. This means that for a loan of £10,000, you may pay 20% of each customer card transaction towards the loan in order to pay off the balance.

So, if a customer spends £150, £30 will be paid directly to your loan provider. Repayment is also made easy as everything happens automatically, providing you with a monthly statement to show a breakdown of what you have paid so far and what you have left to pay. This repayment percentage is negotiable between you and the lender of the cash advance and remains constant throughout the repayment period.

This makes Business Cash Advance a flexible solution as there are no fixed repayments. For instance, you may be budgeting daily card transactions of £200 which would mean £40 (20% of card intakes) paid off each day. If you were to have a sudden drop to £50 revenue in a day, you are safe in the knowledge that your repayment for the cash advance adapts to your revenue so you would only repay£10 with the 20% repayment percentage example.

What are the common industries currently using Business Cash Advance?

Generally, a Business Cash Advance can be used by any industry which sells through card transactions. Some of the most common businesses using cash advance include:

  • Hospitality
  • Hotels
  • Pubs and Restaurants
  • Retail
  • Health and beauty
  • Automotive services
  • Other high streets stores

What are the benefits of using a Business Cash Advance?

The Business Cash Advance method of funding has already swept American businesses and is slowly picking up in popularity in the UK. Here are some of the key reasons why:

  • Easy to secure – there is no need for assets to secure this loan which makes it much easier to obtain than a traditional bank loan or overdraft facility.
  • Simple, flexible repayment – the repayments are percentage based with usually no other costs involved, meaning you can pay the loan back whenever you can without being penalised for a time delay.
  • Use the cash how you please – once you have the money, it is up to you what you use it for, whether it’s for purchasing stock, investing in staff, property refurbishment or maybe even purchasing new premises.
  • No need to change service provider – the majority of lenders for Business Cash Advance have no need for you to change your PDQ service provider, and those that do make it an easy process.

Why do some businesses choose to avoid Business Cash Advance?

When it comes down to it, Business Cash Advance is expensive. Interest rates as high as 25% are common for this type of loan so if you borrow £10,000 you’ll actually end up repaying £12,500. This is a very high cost for a short term loan. In addition, whilst for some businesses the lack of time restraints will be a positive, if your business revenue is strong and you repay the loan quickly, you’ll still pay the same fixed interest. However, due to the lack of requirements to secure the loan and the easy repayment method, it is often justified as a useful short term solution to fund immediate business growth. The interest rate is probably the single biggest reason for businesses avoiding Business Cash Advance and it’s worth investigating other alternative forms of lending such as invoice finance or asset finance before jumping into a Business Cash Advance deal.

What to do now

If you feel a Business Cash Advance may be useful for you, you could speak to a broker who will offer a free service to evaluate the different lenders of Business Cash Advance and decide which is best suited for you. Alternatively, you can ask your own business network (perhaps through LinkedIn) and see if any of your connections have used Business Cash Advance before to find further trusted Business Cash Advance lenders.

Remember that Business Cash Advance should not be used as a long term funding solution as the fees involved can be quite high. However, it may offer the flexible finance alternative you need to invest for growth or to cope with short-term cash flow problems, when bank overdrafts and loans are too difficult to secure.

Alex Kyriacou is brokerage manager at invoice finance specialist Touch Financial.

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