Merchant cash advance and revenue-based finance: how repayments work

If your business takes card payments, there is a type of funding that is repaid from those card sales rather than through a fixed monthly instalment. It is often called a merchant cash advance, or more broadly revenue-based finance. This guide explains how it works, what it costs and when it makes sense.

The basic idea

A provider gives your business a lump sum up front. In return, you agree to repay a fixed total amount. Instead of a set monthly repayment, the provider takes an agreed percentage of your daily or weekly card takings until the total has been repaid.

When trade is strong, you repay more quickly. When it is quiet, you repay less each day. That flexibility is the main attraction for businesses with seasonal or uneven sales, such as hospitality, retail and leisure.

How repayments are collected

There are two common set-ups:

• Split from your card terminal: a share of each card payment is diverted to the provider before the rest reaches your account.
• Direct debit based on sales: the provider looks at your card sales, often through your card processor or bank data, and collects a matching percentage by direct debit.

Some revenue-based products also look at total income, not just card sales, which can help businesses that take payments online or by bank transfer.

How much can you get?

Advances are usually sized on your average monthly card takings. As a broad guide, many providers offer between one and one and a half times your average monthly card sales, sometimes more for established businesses with consistent takings. A business taking £30,000 a month on cards might be offered somewhere around £30,000 to £45,000.

Providers usually want to see several months of card processing history, and minimum monthly takings apply.

Understanding the cost

Revenue-based finance is usually priced with a fixed fee, often shown as a "factor rate", rather than an annual interest rate. For example, a factor of 1.2 on a £40,000 advance means you repay £48,000 in total.

Because the term is not fixed, it is hard to compare directly with a loan's annual rate. If you repay quickly, the effective annual cost is higher; if you repay slowly, it is lower. When comparing:

• Ask for the total amount repayable.
• Ask what percentage of takings will be collected.
• Ask what happens if takings fall sharply or stop.
• Check for any minimum repayment requirements or set end dates.

Advantages

• Repayments flex with trade, easing pressure in quieter months.
• Decisions can be quick, and same-day decisions are often available for smaller amounts.
• Security over property is not usually required, although a personal guarantee may be.
• Approval leans heavily on card sales history, so it can suit businesses with thin or older accounts.

Things to watch

• The total cost can be higher than a conventional loan, particularly if repaid quickly.
• Taking a share of every sale reduces day-to-day cashflow, so plan for it.
• Taking several advances at once can quickly become unaffordable. Many providers will not lend if another advance is already in place, although some will refinance an existing one.
• Changing card processor may be restricted while an advance is outstanding.

Who it suits

Revenue-based finance tends to suit businesses that take a large share of income by card, have uneven or seasonal sales, and want funding for stock, refurbishment, marketing or a short-term cash gap.

If your income is steady and mostly from invoices, a term loan or invoice finance may be cheaper. Our guide to unsecured business loans covers the alternative.

A worked example

Suppose a café takes an average of £25,000 a month on cards. A provider offers a £30,000 advance with a factor rate of 1.25, so the total to repay is £37,500. The agreed collection rate is 15% of card takings.

In a typical month, 15% of £25,000 is £3,750, so the advance would be repaid in about ten months. In a busy summer month of £35,000, the collection rises to £5,250. In a quiet January of £15,000, it falls to £2,250. The total repayable stays at £37,500 whatever happens; only the speed changes.

This is an illustration only. Real offers depend on your trading history and the provider's assessment.

Getting an indication

During our quote, if you tell us you take card payments and your average monthly card takings, we show an indicative revenue-based finance amount. Add your bank statements to sharpen it. Figures are indicative only and subject to lender assessment and approval.