Cash advances

A cash advance is an arrangement whereby your business sells a proportion of its future debit/credit card sales to a finance company in return for an up-front payment. The agreement is limited such that once the finance company has received a pre-agreed repayment amount (obviously larger than the up-front payment to your business!) it ceases. Such arrangements can improve the cash-flow position of the business in question.

The details

A cash advance – often called a merchant cash advance or business cash advance – involves entering into an agreement with a finance company under which you sell a proportion of your future credit/debit card payments in return for an immediate up-front payment. The agreement operates as follows:

• On entering into the agreement your business receives an up-front payment in cash
• Your business pays a proportion of its debit/credit card takings straight to the finance company (5% to 10% is not unusual) – the card processing company usually takes care of this automatically
• Once your business has made payments to the finance company totalling an amount agreed at the start of the arrangement (and obviously more than it received in the up-front payment) the arrangement ceases

The amount your business agrees to repay over time will obviously be larger than the up-front payment you received.

Who provides cash advances?

Cash advances are usually provided by specialist independent finance providers. Sometimes the suppliers of credit card processing terminals can arrange cash advance agreements either directly or through their partners.

Who are merchant cash advances suitable for?

Businesses who frequently take debit/credit card payments for their services (so it's not usually suitable for businesses who use invoices or otherwise operate 'on credit' – for these, invoice discounting and invoice factoring are more suitable).

Advantages

• Cash advances are often easier to obtain than bank loans
• Operating a merchant cash advances arrangement is relatively straightforward
• Repayments are directly linked to your takings meaning that peaks and troughs in your trade are easier to absorb

Disadvantages

• Overall costs can be high compared to, for example, business loans
• Repayments may take a significant chunk out of your daily takings, so you must consider your future cash-flow carefully