What are merchant cash advances?

A merchant cash advance (MCA) is a lump sum of funding provided to your business that's repaid automatically as a percentage of your future card or electronic payment transactions.

In this guide, you'll learn how merchant cash advances work, the potential benefits and risks, and how to decide whether one could be appropriate for your business.

What is a merchant cash advance?

A merchant cash advance provides your business with an upfront sum of money in exchange for an agreed percentage of your future card sales until the advance (plus a fee) has been repaid in full.

It's not technically a loan - you're selling a portion of your future revenue. This distinction can affect how the product is regulated and how costs are expressed.

MCAs are most commonly used by businesses with high volumes of card transactions, such as retail shops, restaurants, pubs, and e-commerce businesses.

How does it work?

Once you receive the advance, repayments are collected automatically from your card terminal or payment processor. A fixed percentage - typically between 10% and 20% - is deducted from each day's card sales.

This means that on busy days you repay more, and on quiet days you repay less. There are no fixed monthly payments, and repayment periods are usually flexible, ranging from a few months to over a year depending on your sales volumes.

The cost is usually expressed as a factor rate (e.g. 1.2 or 1.4) rather than an interest rate. If you borrow £10,000 at a factor rate of 1.3, you'll repay £13,000 in total.

What are the benefits?

• Flexible repayments - they adjust automatically based on your sales, which could help during quieter periods.
• Quick access - funding is often available within a few days of approval.
• No fixed assets required - your future card sales act as the repayment mechanism.
• Simple application - providers typically need a few months' card processing statements rather than detailed financial accounts.
• No personal guarantee - many MCA providers don't require one, though this varies.

What are the risks?

• High cost - MCAs can be significantly more expensive than traditional business loans when compared on an annualised basis.
• Reduced daily income - having a percentage deducted from every day's takings could put pressure on your working capital.
• Difficult to compare - factor rates can make it harder to compare costs against other forms of borrowing.
• Cycle of debt - some businesses take out additional advances to cover repayments, which could lead to escalating costs.
• Limited regulation - MCAs may not be regulated by the FCA, which means fewer protections may be available to you.

Is my business eligible?

Most MCA providers require you to have been trading for at least 6 months and to process a minimum amount of card transactions per month - typically £5,000 or more.

Businesses with lower card sales or those that primarily receive payments by bank transfer may find invoice finance or a business loan more appropriate.

How does it differ from other funding?

Unlike a business loan, an MCA doesn't have fixed monthly repayments - repayments fluctuate with your card sales.

Compared to invoice finance, which is based on your B2B invoices, an MCA is linked to your consumer-facing card transactions.

Asset finance is tied to specific equipment, whereas an MCA provides general-purpose funding.

How do I choose a provider?

• Calculate the total repayment amount and compare it to the amount you'll receive.
• Ask about the daily repayment percentage and how it's calculated.
• Check whether there are any additional fees or charges.
• Find out what happens if your card sales drop significantly.
• Consider whether a different type of funding - such as a business loan - might be more cost-effective for your needs.

How can I learn more?

The British Business Bank provides impartial information on a range of business finance options.

You may also find our guides on business loans, invoice finance, and working capital helpful.