Whether you’re a manufacturer, construction company or retailer, chances are you’ll run into the same issues somewhere down the line in your business journey. For SMEs maintaining business operations and bringing in revenue are top priorities, and you can only do this if you have the capital you need to keep the cogs turning. A cash flow shortage can be avoided if you understand the type of business funding you can qualify for. If your business uses a POS system (i.e. a card machine) or EFTs to receive payments, you’ll likely qualify for a Merchant Cash Advance (MCA). If you are unsure where to even start, let us help you along the way with our full guide:
What is a Merchant Cash Advance?
A merchant cash advance is a loan specifically designed for businesses (merchants) that either uses a POS system or EFTs to receive payments.
The mechanism of funding and repayment is what makes this product unique.
A merchant is essentially buying early access to their expected turnover so that they can use the finance they need. Otherwise known as a business cash advance, an MCA isn’t technically a loan. Instead, it’s a funding type that allows businesses to get access to capital by using their future credit card sales /EFT transaction data. Lenders who offer merchant cash advances will use this data to assess how much you qualify for and how much you should be paying them back.
What monthly transactions can be used to secure funding for an MCA?
Most MCA lenders use card machine data to determine whether you qualify for a loan or not, this is because your business’s card machine offers easy-to-interpret data. For lenders, it’s a convenient way to see how much a business can afford to repay, which makes repayment very easy for the borrower. A card machine is not the only monthly transactional data a lender can use for an MCA, in essence, you can use any monthly transactional data, be that QR code payments via Snapscan or Zapper, or EFT transactions. A lender wants to be able to use the transactional data to determine what loan you can afford, and also how they should structure the loan.
Most MCA lenders automatically deduct a portion of your future card sales, to make for easy and proportional repayment.
*the transactional data requirements may vary from lender-to-lender
What industries use Merchant Cash Advances?
Any business that receives payments via a POS (i.e. card machine) or EFT will likely qualify for a MCA. This type of business loan is designed specifically to help the following industries:
- Retail trade
- Technology& communications
Is a MCA a type of unsecured loan?
Because the lender is making a decision on your propensity to pay, not how many assets you own, this is a type of unsecured loan. Unsecured loans like this use alternative data to make a loan decision. The borrower doesn’t need to put up a tangible asset, so the lender assumes the risk of the advance. This does however mean your credit score is at risk should you default on your loan repayments.
How do I qualify for a Merchant Cash Advance?
Through FundingHub, you are likely to qualify for a merchant cash advance if you meet the following criteria:
- You have monthly transactional data via POS or EFT
- 6 months trading history
- An average of R40k+ revenue per month through transactions
* Figures are for example purposes only, and may vary from business to business.
How Does a Merchant Cash Advance Work?
A merchant cash advance has two main features:
- It depends on how much revenue you make through your EFT transactions or POS system/payment gateway.
- How much you repay, and how fast you repay it is directly linked to how much revenue you make.
What do you need to consider when applying for a Merchant Cash Advance?
The factor rate is essentially the cost or interest rate that gets charged to you for using the facility.
As an example, if a factor rate of 1.25 is applied to your R100 000 merchant cash advance, your total cost of finance will be R25 000.That's R100 000 x 1.25 = R125 000. This means that the total amount you will have to pay back is the loan (principle) amount multiplied by the factor rate.
The factor rate is calculated by the lender based on how risky they deem the loan to be. The more risk, the higher the factor rate.
Repayment of your total loan amount usually happens on a proportional-to-revenue basis. This means that the more revenue you make, the more you repay, and vice-versa. The % of your revenue which you repay will be decided between you and the lender. This will be based on your affordability, and how much margin you have on your products.
💡 Tip: For an MCA, there is no advantage to early repayment. Because the factor rate is fixed, you will not be able to reap the benefits of lower interest payments if you repay earlier.
Because of the fact that your repayment is linked to how much revenue you earn, there is generally no fixed repayment period on a MCA.
If your revenue spikes, you repay the loan faster.
How Much Does a Merchant Cash Advance Cost?
The cost of a merchant cash advance is calculated using a Factor Rate. This determines your final loan cost.
The factor rate of your merchant cash advance can range from 1.15 to 1.4.
If you'd like an estimate on how much a MCA costs use our Merchant Cash Advance calculator.
What factors affect the cost of a Merchant Cash Advance?
The calculation of your merchant cash advance factor rate includes things like:
- How much card machine turnover your business makes every month
- How variable your card machine turnover from month to month is
- Your current debt levels
- How long your business has been operating for
- How many transactions your card machine turnover is made up of
- The margin you charge on your products
- Director's credit score. Although some lenders do not take this into account, and the majority of the risk is dependent on your business, some lenders will be wary if the business has any directors who are currently under debt review or have any adverse judgement against them.
What Can You Use an MCA Loan For?
Anything you'd like. It's very seldom that a lender stipulates your use of funds.
Common Merchant Cash Advance Uses
Here is a list of some of the common reasons a merchant might want to use a merchant cash advance:
· Working capital: For general cash flow in business operations.
· Growth capital: Cash to grow your business through new ventures, or increased investment spending.
· Buying inventory: Buying more stock so that you can sell more, and earn more revenue.
· Tax/VAT Payments: If you are hit with a big tax bill that you may not be able to afford upfront you can finance it using an unsecured loan. An MCA will help you split up that payment over a few days.
· Meeting payroll: If you have a slow month, and think you might not be able to pay your employees, a MCA might help you out.
· Remember: A MCA is a relatively expensive loan, so you should always consider what your use of funds is and whether it's appropriate to use an MCA for that or not, given the cost.
Pros & Cons of a Merchant Cash Advance
5 advantages of a MCA
Here are some reasons why some business owners opt to use a merchant cash advance facility:
1. It's fast.
Because it's a data-backed loan, and the data is normally readily accessible, loan decisions are made fast, and funds can be in your account within hours.
2. No security or collateral required.
This makes it a great option for small businesses that do not own fixed assets like property.
3. A repayment structure that works with you.
Revenue-proportional repayment means that you don't have the stress of worrying about slow months where revenue is down, and it's never going to cost you more if you take longer to pay.
4. No restriction on the use of funds.
Although it's required that you have a card machine to qualify for this loan, there is no/little restriction (lender-dependant) on what you can do with the funding once you have it.
5. Free application.
FundingHub will never charge you to make an application - or ever. Our service is free, and if you can get an MCA loan in SA - we'll help you find it.
2 Disadvantages of an MCA
There are cons to MCAs too. Here are some of them:
1. It's expensive.
Like any unsecured loan, a merchant cash advance is more expensive than your normal secured (property-backed) loan. This is because of the increase in risk that the lender is undertaking.
2. Short Term Solution
MCAs are not typically used as a long-term solution for any business, most of the time it’s just to facilitate short-term growth e.g. festive season sales. This type of loan is used for dips in cash flow, or unexpected bills, not as a long-term plan.
How Does the MCA Loan Application Process Work?
Because an MCA is a specialized product, we've designed a special application process that only takes up a small amount of your time, and collects the right information.
Here's how it works.
Step 1: Apply through FundingHub
One application form will mean you find MCA loan offers from over 15 different MCA-specific lenders.
It's fast, and free, and fully online.
Step 2: Add Information and Documents
If there are any supporting info or documents required, you can provide them during the application - or at a later stage too.
Step 3: View Loan Offers
We will present you with a list of all your loan offers. This takes seconds to fetch, and the list will be continually updated as you add more information to your profile.
Step 4: Choose an Offer
All the specifics around, pricing, fees, speed of funds and the different lenders are laid out for you. If you have questions, we've got an independent analyst who can help you choose the right offer.
Step 5: Finalise Application with Lender
With your permission, your details will be shared with the lender who will disburse the loan to you. They'll collect your bank details, approve your offer and pay you out. We'll be here if you need any independent advice along the way.
Frequently asked questions about Merchant Cash Advances:
What’s the difference between a merchant cash advance and a business loan?
More and more small businesses are opting for cash advances instead of loans these days. Why? Because cash advances don't have to be paid back all at once - you can repay them gradually through a percentage of your future sales. This makes them much more manageable for businesses that might not have the cash flow to repay a lump sum all at once.
Another advantage of cash advances over loans is that they're easier and faster to obtain. So if you need funding quickly, a cash advance might be the better option. Of course, every business is different and there's no one-size-fits-all answer when it comes to choosing between a loan or a cash advance, however, there are some key differences. A business loan will be paid back according to set terms and a predetermined period. An MCA is structured differently, as you’ll only “payback” money based on a percentage of your credit card sales/EFT. The payments will vary from month to month, because it’s determined by the volume of sales – for business owners, this eliminates huge stress associated with large unexpected loan repayments.
What alternatives are there to a merchant cash advance?
If you are unable to qualify for a merchant cash advance because of your transactional data or possibly a bad credit score. There are other types of business finance you should consider, if you own a property or asset, a secured loan is your best bet. Let our FundingHub team assist you by matching your business needs with the right lender.
What will happen if I default on merchant cash advance repayments?
Business owners usually apply for a merchant cash advance because they’ve run into cash flow issues. There can be a number of reasons for this, and it’s most likely that this funding will be used to fill in the gaps and keep the business growing. The last thing you want is to rely wholeheartedly on the merchant cash advance to keep your business afloat. If you’ve run into payment issues, and the revenue isn’t trickling in as it should you might face the risk of defaulting on your merchant cash advance.
Defaulting means that you are unable to pay off your loan according to the terms agreed upon by you and the lender. Failing to pay this amount can lead to severe consequences, and your business could be in jeopardy because of this. MCAs do not use collateral to secure the loan, so the lender could end up filing a lawsuit against you to retrieve the money. Obviously, this is a worst-case scenario, and this can be avoided by planning ahead and not solely relying on the MCA to get by.
Why should you compare different merchant cash advances?
A merchant cash advance is designed specifically to help your business grow, to secure the loan you’ll use your business’s transactional data. There are a number of lenders in South Africa that offer a merchant cash advance, each with its own payment terms and interest rates. Navigating the world of merchant cash advances can be quite complicated especially if it’s your first time applying for a MCA loan. FundingHub makes business finance simple by comparing offers from reputable MCA lenders. In a couple of minutes, you’ll be able to choose which lender is best suited to your needs.
Does a merchant cash advance affect your credit score?
Like any business loan when applying for a merchant cash advance the lender will look at your credit report as well as your transactional data to determine what loan you qualify for. However, if you have a below-average credit score, you could still apply for a merchant cash advance, because the lenders are likely to focus more on the projected revenue of the business rather than its credit rating. Only if your business defaults on payments will it negatively impact your business credit score.