Merchant cash advances (MCAs) are one of the most innovative products in alternative business finance. The concept has only existed for a few years, but it’s already proving very popular in the retail and leisure sectors. Put simply, an MCA uses your card terminal as security for borrowing — perfect for businesses without many assets, but who have a good volume of card transactions every month such as retailers and pubs/restaurants.
Repayments are taken directly from the terminal provider and are taken as a percentage of card takings, meaning it is perfect for seasonal businesses as you repay a percentage of sales as opposed to a fixed amount.
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An MCA is charged through a factor rate which is essentially a multiplier of the loan. As an example, if you borrow £100,000 and the factor rate is 1.2 then over the term, you will pay back £120,000 (£100,000 * 1.2). The repayments are then taken as a % of card sales over a period of time – the % is fixed which estimates the term of the facility but the term is variable depending whether sales are more or less than anticipated.
Below is an example:
| Monthly Card Sales | £100,000 |
|---|---|
| Loan | £150,000 |
| Factor Rate | 1.2 |
| Total Repayment | £180,000 |
| % repayment | 15% (of monthly card sales) |
In this example, 15% of card sales are taken (£15,000 per month) to repay the loan and the loan would be repaid back over 10 months.
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