A business cash advance defined
A merchant cash advance is a funding arrangement in which a funder buys an agreed slice of a business's future card receivables and pays for them upfront as a single lump sum. The business is not borrowing and does not take on a debt in the conventional sense. It sells card sales it already expects to make, at a discount to their face value, and the funder collects those sales as they come in through the card terminal.
That one structural fact explains nearly every other feature of the product. Because the funder owns a share of future card takings rather than holding a promise to repay by a certain date, there is no fixed monthly instalment, no maturity date and no interest accruing on an outstanding balance. There is an agreed total to deliver and an agreed percentage of daily card payments that goes towards delivering it. When trade is strong the advance clears faster. When trade is quiet it takes longer, and no arrears build up in the meantime.
The names vary more than the mechanics do. Business cash advance, card sales advance, merchant funding and revenue-based advance all describe the same arrangement, and funders often brand their own version. We arrange these advances as a broker rather than providing the money ourselves, so the first question we ask any business is not how much it wants but whether this structure genuinely fits the way it trades.
Why an advance against card takings is not a loan
The distinction between a purchase and a loan is not a marketing nicety. It changes what you are signing, what the funder can do if things go wrong and which rules apply. A loan creates a debt: a principal sum, an interest rate, a repayment schedule and a date by which the whole thing must be settled. An advance against card takings creates a sale: the funder has bought receivables, and its return depends on those receivables arriving.
- No fixed term. A loan matures on a set date. An advance completes whenever your card takings have delivered the agreed amount, which might be sooner or later than either side expected.
- No interest, and no APR in the usual sense. The cost is fixed at the outset by a factor rate applied to the advance, so the total does not grow if delivery takes longer than forecast.
- No fixed instalment to miss. Because collection is a percentage of what you actually take, a quiet week reduces the amount collected rather than putting you behind.
- Usually unsecured against property. Funders rely on your card turnover rather than a charge over premises, though most will ask a company director for a personal guarantee of performance.
The trade-off is that this flexibility is paid for. Fixed cost with variable timing is genuinely useful to a business with uneven takings, and funders price that usefulness in. Anyone comparing a merchant cash advance with a bank facility purely on headline cost is comparing two things that behave very differently once money is tight.
What people mean when they say merchant loan
Merchant loan is one of the most searched terms in this corner of business finance, and in almost every case the searcher means a merchant cash advance. The word loan has stuck because the experience feels loan-like from the outside: you apply, money arrives, and it goes back out over time. The paperwork tells a different story, and it is worth understanding the gap before you sign.
A genuine merchant loan would be exactly that, a loan advanced to a merchant, with interest and a repayment schedule. Some lenders do offer short-term unsecured business loans to card-taking businesses and market them alongside advances, which adds to the confusion. If a product has a fixed monthly payment and a stated APR, it is a loan whatever the website calls it. If it has a holdback percentage and a factor rate, it is an advance.
The practical importance is what happens in a bad month. On a loan, the payment leaves your account whether or not you took any money that month. On a merchant cash advance, a bad month simply means less is collected. Businesses that come to us asking for a merchant loan usually want the second behaviour, and part of our job is making sure the paperwork actually delivers it rather than a fixed-instalment product wearing similar language.
The mechanics of a card sales advance
Three numbers define any card sales advance, and every quote you receive should state all three plainly. The advance amount is the cash paid to you. The factor rate is the multiplier that turns that cash into the total the funder is owed. The holdback, sometimes called the split or the repayment percentage, is the share of each day's card takings that goes to the funder until the total is delivered.
Collection happens automatically and daily. Depending on the arrangement, your card acquirer splits the day's settlement at source and sends the agreed share straight to the funder, or the funder takes the agreed percentage by direct debit against the previous day's takings. Either way you do not write cheques or diarise payment dates. What lands in your account is your share of what you took, which is why owners often describe an advance as being easy to forget about once it is running.
The absence of a fourth number is as telling as the presence of the first three. Nowhere in the agreement is there a date by which the total must be delivered, because that date depends on trade the funder cannot control. Owners used to conventional lending sometimes read that as an omission and look for the maturity clause. On a properly structured advance there is none, and its absence is precisely what the factor rate is buying.
Holdbacks typically fall between 5 and 20 percent of daily card takings, set at a level the funder believes your trading can absorb. Advances typically run from £5,000 to £500,000, and most funders size the amount somewhere near one month's card turnover. The step-by-step flow, from application to the day the balance clears, is set out in our guide to how a merchant cash advance works.
What merchant funding costs in practice
Cost on this product is expressed as a factor rate rather than an interest rate, and the two are not interchangeable. A factor rate is a simple multiplier: you take the advance, multiply by the rate, and the answer is the fixed total the funder expects to receive. Factor rates in the UK market typically sit between 1.1 and 1.5, with the rate depending on your card turnover history, your industry, the length of trading record and the holdback you can support.
A worked example makes it concrete. A business takes an advance of £20,000 at a factor rate of 1.25. The total to deliver is £25,000, so the cost of the funding is £5,000. If the holdback is 10 percent and the business takes £30,000 a month on card, roughly £3,000 goes to the funder each month and the advance clears in around eight months. Take more and it clears sooner. Take less and it stretches, but the £25,000 total does not move.
That last point is the one most often misunderstood. Because the total is fixed, paying an advance off quickly does not usually save you money the way overpaying a loan does, and the effective annualised cost rises the faster you clear it. If you want to see how the multiplier maps onto a percentage figure you can compare with a loan, our sister site explains how a factor rate is calculated in detail.
Who qualifies for an MCA
Eligibility for an MCA rests on trading evidence rather than balance sheet strength. The funder is buying future card sales, so the question it asks is whether those sales are real, regular and large enough to deliver the advance within a sensible period. That reframing is why businesses turned down for a bank loan are often approved for an advance, and why some profitable businesses with little card income are not.
- Card trading history. Most funders want to see at least three months of card takings, and many prefer six or more. Longer histories usually improve both the amount offered and the rate.
- Monthly card volume. Around £2,500 a month in card takings is a common minimum, though the practical floor is higher for larger advances.
- Consistency. Steady daily takings are worth more to a funder than a single strong month, because delivery depends on regular flow.
- Credit history as a secondary factor. Adverse credit is not automatically fatal. It tends to affect the factor rate and the size of the offer rather than the decision itself.
Underwriting is usually quick because the evidence is already digital: merchant statements, bank statements and, increasingly, a read-only feed from the acquirer. We set out the full requirements, including what funders look for in your statements, on our merchant cash advance eligibility page.
Which UK businesses use a revenue-based advance
A revenue-based advance suits businesses whose income arrives in many small card transactions rather than a few large invoices. That points squarely at consumer-facing trade, and the customer base reflects it: restaurants, pubs, cafes, takeaways, hair and beauty salons, independent retailers, garages, hotels and online sellers whose payments run through a card processor.
Within those sectors the common thread is a purchase that needs to be made now and paid for out of trading. A restaurant refitting a kitchen before the summer, a salon buying a second treatment room's worth of equipment, a shop funding stock ahead of Christmas, an online seller buying inventory for a promotion. In each case the spend is expected to lift card takings, and the advance is delivered out of those same takings.
Businesses with little or no card income are the poor fit. Wholesalers paid on 60 day terms, contractors invoicing monthly and professional firms billing in arrears have revenue, but not in a form a merchant cash advance can collect from. Those businesses are usually better served by invoice finance or a traditional facility. If your trade sits in hospitality or retail, our sector pages cover the specifics, including how we approach funding for restaurants.
Where merchant services cash advances sit in UK regulation
Honesty about regulation matters more here than in most areas of business finance, because the answer is not the one most people assume. A merchant services cash advance to a limited company is commercial funding, and commercial funding of this kind is not a regulated credit activity in the United Kingdom. The agreement is not covered by the Consumer Credit Act, and the funder does not need Financial Conduct Authority authorisation to provide it.
There are exceptions worth knowing. Where the customer is a sole trader or a small partnership, an agreement can fall within the Consumer Credit Act in certain circumstances, which brings different disclosure obligations and different rights. The position depends on the structure of the business and the agreement, and it is one of the first things to establish rather than assume. We cover it in more detail on our sole trader cash advance page.
What unregulated means in practice is that the contract is the protection. There is no statutory cooling-off period on a limited company agreement, no automatic right to complain to the Financial Ombudsman Service, and the terms you sign are the terms that govern. We are an introducer and arranger, not a lender and not FCA-authorised, and we tell clients plainly that the document deserves a careful read or a solicitor's eye before signature. Reputable funders in this market do publish clear terms, and the ones that do not are the ones to walk away from.
A merchant loan advance compared with a business loan
Setting a merchant loan advance beside a conventional business loan shows why neither is simply better. They solve different problems, and the right answer depends far more on how your income behaves than on the headline cost of either.
| Feature | Merchant cash advance | Business loan |
|---|---|---|
| Legal nature | Purchase of future card receivables | Debt with interest |
| Cost expressed as | Factor rate, typically 1.1 to 1.5 | Interest rate and APR |
| Repayment | Percentage of daily card takings | Fixed monthly instalment |
| Term | Variable, usually 4 to 18 months | Fixed, agreed at the outset |
| Effect of a quiet month | Less collected, no arrears | Payment due regardless |
| Typical decision basis | Card turnover and trading history | Accounts, credit file, security |
Read the table as a description of risk rather than a scoreboard. A loan gives you the lower cost of capital and the certainty of a schedule, provided your income is predictable enough to meet it. An advance gives you protection against your own bad months, paid for through a higher total cost. A business with reliable monthly revenue and time to apply is usually better off with the loan. A seasonal business, or one that needs money inside a week, often finds the advance is the only structure that actually works.
Comparing offers on a like-for-like basis is where most owners need help, because the two products do not describe cost in the same language. A loan quotes a rate that accrues on a falling balance, so the total depends on how long you take. An advance quotes a total from the outset and leaves the timing open. To set them side by side you have to convert the factor rate into an annualised figure using the delivery period you actually expect, and small changes in that period move the answer considerably.
The UK market for these advances includes specialist funders such as YouLend, Liberis, Capify, 365 Business Finance and iwoca, alongside advance programmes offered through card acquirers including Barclaycard, Lloyds Cardnet, SumUp, Dojo, Worldpay, Stripe and PayPal. Terms vary more between them than the marketing suggests, particularly on holdback flexibility, early settlement and how renewals are handled. We arrange across the market rather than for any one funder, which is the point of using a broker at all.