What Is a Merchant Cash Advance UK?
Brandon Conway
Business Development Executive · Apr 7, 2024 · 6 min read
A merchant cash advance (MCA) is a form of business financing where a lender advances you a lump sum in exchange for a percentage of your future card sales, plus a fee. It is not technically a loan, which means it sits outside some standard lending regulations. Understanding exactly how it works is essential before you apply.
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How a merchant cash advance works
The lender advances you a sum (typically 75% to 150% of your average monthly card takings). In return, you agree to surrender a fixed percentage of your daily card sales (the holdback rate, typically 10% to 20%) until you have repaid the advance plus the factor fee. On a high-revenue day, you repay more; on a quiet day, you repay less. There is no fixed monthly payment.
The factor rate determines the total repayable. A factor rate of 1.3 means you repay 1.3 times the amount advanced. So a £50,000 advance at 1.3 means repaying £65,000. There is no APR calculation required by law for MCAs, which makes them harder to compare to conventional loans. Converting to an equivalent APR usually shows costs of 40% to 150% or more.
When an MCA makes sense and when it does not
MCAs are most appropriate for businesses that cannot access conventional finance, need funds very quickly (often funded within 24 hours), and have highly variable revenue that makes a fixed monthly payment difficult to manage. Hospitality, retail, and leisure businesses with good card processing volumes are the typical users.
For any business that can access a conventional loan or revolving credit facility, an MCA is almost certainly more expensive. The absence of a fixed payment schedule can seem attractive but the effective rate makes it a costly form of finance. Always compare the total cost of an MCA against the next best conventional alternative before proceeding.
"An MCA is a useful tool for a specific set of circumstances. For most businesses that qualify for a conventional loan, it is not the right choice. Always understand the equivalent APR before signing."
- Brandon Conway, Business Development Executive
Frequently Asked Questions
Is a merchant cash advance regulated in the UK?
MCAs are not currently regulated under the Consumer Credit Act in the same way as conventional business loans. The FCA is reviewing the regulatory framework. This means some protections that apply to loans do not apply to MCAs, which is why understanding the full terms before signing is particularly important.
The bottom line
Spark Finance arranges MCAs for qualifying businesses and will always show you how the cost compares to conventional alternatives. Start at apply.sparkfinance.co.uk.
Check your eligibilityAbout the author
Brandon Conway
Business Development Executive
Brandon is a Business Development Executive at Spark Finance with extensive experience placing asset finance and business loans for UK SMEs. He works closely with businesses that have been declined by high street banks, finding specialist lenders suited to adverse credit and complex trading profiles.
