What is a merchant cash advance and how does it work?

A merchant cash advance (MCA) is a way for a business that takes card payments to get a lump sum now and repay it as a share of its future card sales. This guide explains how a merchant cash advance works, what the terms and cost usually look like, and the kind of business it can suit. It's different from a standard loan, and the differences matter when you compare costs.

How a merchant cash advance works

1. You receive a lump sum, based largely on your recent card takings.
2. You agree a repayment total. This is the amount you'll pay back, which is more than you receive. The difference is the cost.
3. You repay as a share of your card sales. A fixed percentage of your daily card takings goes to the provider automatically until the total is paid.

Because repayments follow your sales, a quiet week means a smaller repayment and a busy week means a larger one. You aren't tied to a fixed monthly amount that stays the same whatever the tills are doing.

What does it cost?

A merchant cash advance is usually priced as a fixed fee, often shown as a multiple of the amount advanced, not as an annual interest rate. That makes it hard to compare directly with a loan.

The cleanest way to compare is to look at two numbers:

• How much you receive
• How much you'll repay in total

The gap between them is the cost. Then consider how quickly you'll repay it. If your card sales are strong, you'll repay faster, but the total stays the same, so the effective annual cost is higher than it looks. A merchant cash advance can cost more than a conventional loan, so make sure the speed and flexibility are worth it to you.

Merchant cash advance terms to check

Before you agree to a merchant cash advance, the agreement should make these points clear:

• The amount advanced and the total you will repay
• The percentage of card takings taken each day, and how long repayment is likely to take
• Any fees, such as set-up or admin charges
• What happens if you want to repay early, and whether any of the cost is reduced
• Any restrictions on your card terminal or card processing arrangements

If anything is unclear, ask the provider to explain it in writing before you proceed.

Who it can suit

A merchant cash advance tends to fit businesses where:

• a large share of takings comes through card payments, such as shops, cafes, restaurants, salons and garages
• sales are seasonal or uneven, so a fixed repayment would be uncomfortable
• you need funds quickly and don't have property to offer as security

Things to weigh up

• It's not cheap money. Compare the total repayable with other options.
• Repayments come out of every sale. On thin-margin days, check you can still cover costs.
• Your card terminal arrangements matter. Some providers need your card payments to run through a particular route, so read the agreement for any restrictions on changing provider.
• Know the term. Repayment length depends on your sales, so ask for an estimate and what happens if sales fall.

Alternatives to consider

If your income is steady and predictable, a term loan with fixed repayments may cost less overall. If your cash is tied up in unpaid invoices instead, invoice finance may fit better. Our guide to getting a business loan in the UK compares the options.

Checking what's available

We're a commercial finance broker, not a lender. We introduce your business to lenders on our panel, including merchant cash advance providers, so you can compare without approaching each one yourself. It's free to check, and any fee is confirmed before you proceed.

You can check your options in a few minutes, with no obligation.