I am regularly seeing posts on US finance and business sites offering ‘Merchant Cash Advances’ and they are becoming more popular in the UK also. Thought a simple explanation might be useful.
Merchant Cash Advances are provided by specialist lenders, to businesses that have a reasonable volume of credit card receipts. The way that they work is that the lender examines your card receipts over the last 12 months and works out an average figure which they can use as a basis of what you can afford to repay – and from that they work out how much to lend. They are one of the simplest loans to arrange as they don’t undertake that many checks (usually trade references) or need security. They then make arrangements with your card processing provider that a certain percentage of every payment you recieve will be ‘diverted’ to them. That becomes your repayments. As they are in control of this and they know what your likely pattern of income is they can design a bespoke deal for you.
They cannot be called loans – as the product is not regulated. They treat them as an advance payment of future receipts. It is therefore important to know who you are dealing with. In the US there has been a proliferation of lenders in this market and some adverse publicity. In the UK there are really only two prime lenders, although if you search for the product you will find a lot of businesses that claim to offer this (in reality they are brokers who are introducing deals to the two lenders). Be wary – I had to take one of them to Court last year!
The good thing about the product is the flexibility – because you only make repayments as a percentage of your income and the schemes can therefore be good for seasonal businesses.
The downside is the cost – a loan of say £30k may have a cost of up to £12k. Because of the amounts being ‘hived off’ your receipts (typically 20%) it also hits your cashflow. It is therefore only something you would use if it was a ‘means to an end’.
A good example is where I arranged an advance for a Knightsbridge hairdressing business who had no choice but to refurbish their salon. They knew that the refit would immediately increase their takings by 25% (more seats n sinks) but they didn’t have the cash and the bank wouldn’t help. We worked out that despite the cost of funding it would still pay for itself in 6 months, then they would have the long term benefit – so it was worth taking on.
I have a good knowledge of the lenders in the market and how the schemes work – so am able to help anyone interesting in exploring this, with appropriate caution!