How a merchant cash advance works (and what it really costs)

If your customers pay mostly by card, someone has probably offered you a merchant cash advance. Restaurants, cafés, pubs, salons and shops are the usual targets, because their card takings are easy to see and easy to collect from.

An advance can be genuinely useful. It's fast, it doesn't usually need property as security, and repayments shrink when trade is quiet. But the pricing is quoted in a way that makes it hard to compare with a loan, and the businesses that get into trouble with advances usually didn't understand the true cost. This guide explains how it works and how to compare it properly.

How a merchant cash advance works

A merchant cash advance (MCA) is a lump sum paid to your business up front. In return, you agree to pay back a larger fixed amount, collected as a percentage of your future card sales.

In practice:

1. The provider looks at your card takings, usually several months of statements from your card terminal provider, plus your bank statements.
2. It offers an advance, often sized as a proportion of your monthly card turnover, with a fixed total to repay.
3. You agree a split, the percentage of each day's card takings that goes to the provider. It's sometimes called the retrieval or holdback rate.
4. Repayments come out automatically. Depending on the set-up, the provider either takes its share before your card settlements reach your bank, or collects it by direct debit based on your takings.
5. It ends when the agreed total is paid. There's no fixed end date, only an estimate based on how much you usually take.

Some newer products, sometimes sold as revenue-based finance, work the same way but take a share of all money coming into your bank account rather than just card sales. Others replace the percentage with a fixed daily or weekly debit, which removes the main advantage of an MCA. Check which you're being offered.

The factor rate, and why it isn't an APR

The cost of an MCA is set by a factor rate: a multiple of the advance that fixes how much you'll repay. Factor rates are often somewhere around 1.1 to 1.5, depending on your trading history and risk.

Advance × factor rate = total you repay

So a £20,000 advance at a factor rate of 1.2 means repaying £24,000. The cost is £4,000, whether you repay in four months or fourteen.

That's why a factor rate isn't comparable with an interest rate or an APR (annual percentage rate). An APR measures cost over time: interest builds up while you owe the money. A factor rate is a flat charge on the whole amount, fixed on day one. A factor rate of 1.2 sounds like 20%, but you're paying that £4,000 for having the money for a few months, not a year, and you're handing it back from the first week.

Why speed of trading changes the real cost

With an MCA, busier trading means faster repayment. That feels good, but it means you pay the same £4,000 for a shorter use of the money, so the equivalent annual cost goes up.

Here's the same £20,000 advance at a 1.2 factor rate, repaid at different speeds:

These figures are approximate. They assume repayments come in evenly, which they won't exactly, and they leave out any other fees. But the pattern is the point: the faster you trade, the dearer the advance is in annual terms.

The flip side is that in a quiet month you repay less, and nobody chases you for a missed instalment. That flexibility is real, and for some businesses it's worth paying for.

How to compare an MCA with a loan

You can't compare a factor rate with a loan's interest rate directly, but you can compare them fairly:

1. Estimate how long the advance will take to repay. Divide the total repayable by the split multiplied by your realistic monthly card takings. Use a quiet-month figure as well as a busy one.
2. Get a loan quote for the same amount over that period, and ask for the total amount repayable in pounds, including fees.
3. Compare the two totals over the same time. Then decide whether the MCA's flexibility is worth the difference.

A worked example, for illustration only. A café takes about £40,000 a month on cards and is offered £20,000 at a factor rate of 1.2, with a 12% split. At £40,000 a month, 12% is £4,800, so the £24,000 total would be repaid in about five months. In a slower patch at £30,000 a month, it would take nearer seven.

Now suppose a lender offers a six-month loan of £20,000 with £21,500 to repay in total. The loan costs £1,500. The advance costs £4,000 over a similar period. The question for the café is whether flexible repayments are worth an extra £2,500. If takings are steady, probably not. If the next quarter is genuinely uncertain, perhaps.

MCAs are not loans, and are not regulated

Legally, an MCA is usually structured as the provider buying a share of your future card receipts, not lending you money. That has consequences:

• It isn't regulated credit. The FCA doesn't regulate merchant cash advances as lending. That's true even for sole traders taking small amounts, where an equivalent loan of £25,000 or less would normally be regulated. You don't get the protections that come with regulated credit, so read the agreement carefully.
• There's no APR on the paperwork. Providers aren't required to show one, which is why you need to do the comparison yourself.
• Early settlement may not save you much. Because the cost is fixed on day one, paying off early often means paying the full agreed total. Some providers offer a discount for early settlement; ask before you sign.
• Personal guarantees vary. Many providers ask directors for a guarantee, sometimes limited to breaches of the agreement, such as switching card terminals or diverting takings, rather than a guarantee of the full amount. Read exactly what you're guaranteeing. Our personal guarantees guide explains the different types.

When a merchant cash advance makes sense

An MCA can be a sensible choice when:

• Most of your income comes through card payments, so the repayment mechanism matches how you actually get paid.
• Your takings are seasonal or uneven. Repayments fall in quiet weeks, which can protect your cash when a fixed loan instalment would hurt.
• You need money quickly and the use is short term, such as stock before a busy season or an urgent repair that keeps you trading.
• Your credit history rules out cheaper options. Providers focus mainly on your card takings, so an MCA can be available when a bank loan isn't. If that's your situation, our guide to business loans with bad credit covers the alternatives worth trying first.
• The money will earn more than it costs. Stock you'll sell at a healthy margin within weeks can justify a pricey advance. Plugging a permanent hole in the business can't.

When it becomes a trap

The problems with MCAs usually come from using them repeatedly, not from a single advance.

• Stacking. Taking a second advance from another provider while the first is still being repaid. Two splits of 10% to 15% each can take a large slice of every sale, leaving too little to run the business, which pushes you towards a third. Many agreements also forbid other advances against the same takings.
• Early renewals. Some providers offer a new advance before the old one is repaid, deducting the outstanding balance from the new money. Check whether you're effectively paying a fresh factor rate on money you already owed. If so, the renewal costs far more than it looks.
• Funding losses. If the business isn't making money, an MCA only delays the problem at a high price. That's the time to talk to an accountant, not to take on more finance.
• Ignoring the split. A split that's affordable in your best month can be painful in your worst. Model it on your quietest month from the last year.

MCA compared with the alternatives

Questions people ask

What is a factor rate?

A factor rate is a fixed multiple of the advance that sets how much you'll repay. An advance of £10,000 at a factor rate of 1.3 means repaying £13,000. Unlike an interest rate, the cost doesn't change with how long you take to repay, so a quick repayment makes the advance more expensive in annual terms.

Is a merchant cash advance a loan?

Not legally. It's usually structured as the provider buying a share of your future card sales. That's why it isn't regulated by the FCA as credit and doesn't come with an APR, even though it works like borrowing in practice.

What happens if my card takings drop?

Your repayments fall too, because they're a percentage of what you take. The advance just takes longer to repay, and the total you owe stays the same. Check the agreement for any minimum payment terms or conditions about how much you must trade through the card terminal.

Can I get a merchant cash advance with bad credit?

Often, yes. Providers look mainly at the volume and consistency of your card takings rather than your credit score alone. Expect a higher factor rate, and compare the total cost with other options before you agree.

Can I pay off a merchant cash advance early?

You can usually settle early, but you'll often owe the full agreed total, because the cost is fixed at the start. Some providers offer an early settlement discount. Ask for it in writing before you sign if you think you might repay early.