Merchant Cash Advance

What transactions can be used to get a Merchant Cash Advance?

What is a merchant cash advance?

Firstly, let's start off by understanding what a Merchant Cash Advance is. Essentially, it's a type of business finance where a merchant(business) can use their transactional data to secure funding. If a business decides to go this route, the lender will directly liaise with the company that processes your transactions i.e. the POS provider/card machine provider.  

The lender will then have a look at how many payments come through this type of transaction and then will use this data to decide how much you can borrow and what the terms should be for paying back the finance.  

All business finance types are set up differently, and with a merchant cash advance the cost of your loan will depend on a number of factors. These can include your turnover, the volume of transactions and your credit rating. The merchant cash advance is structured different because instead of paying a set amount every month (as you would with a normal term loan), these repayments are based solely on how your business trade is going. The lender will take the money directly from the “source” - in this case it’s the POS provider. The amount you pay is also quite flexible as it’s usually adapted to your business’s income. This type of finance is particularly useful for businesses that experience seasonal peaks.  

What types of transactional data can be used to secure a Merchant Cash Advance?

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

Examples of transactional data:

  • QR code payments e.g. Snapscan and Zapper
  • Card machine payments e.g. Yoco, iKhoka and Capitec card machines
  • EFT transactions  

*this data will vary from lender to lender as some lenders will only accept card machine transactional data

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 is your card machine (or transactional data) 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 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.

Still feeling a bit stuck? Read our full guide on how a Merchant Cash Advance works, or fill in our application and one of our business analysts can assist you.  

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