Key points
- A merchant cash advance (MCA) is repaid by taking a fixed percentage of daily card takings until a set total has been collected.
- The cost is quoted as a factor rate, not an APR. Converted to an annual figure it is usually far higher than it first appears.
- Taking a second advance to cover the first, or stacking several at once, is the most common route into unaffordable MCA debt.
- Refinancing into a term loan can cut the cost, but providers will only consider it where the business is still trading profitably.
- If card takings have fallen and the advances cannot be serviced, Business Debtline and, where necessary, a licensed insolvency practitioner should be consulted.
How a merchant cash advance works
An MCA provider pays a lump sum to the business up front. In return the business agrees to repay a larger fixed total, collected as a percentage of each day's card sales until the total is reached. The percentage taken is called the holdback or split, and the fixed total is the advance multiplied by the factor rate.
Because collection is linked to card sales, there is no fixed monthly payment and no fixed term. A busy month repays more, a quiet month repays less. Providers present this as flexibility, and for a short period it can be. The problem is that the total to be repaid never changes, however long collection takes, and the product is designed to be repaid quickly.
Why the factor rate is not an APR
A factor rate is a simple multiplier. A £20,000 advance at a factor rate of 1.3 means the business repays £26,000, so the fee is £6,000. Expressed as a percentage of the advance that is 30%, which sounds comparable to an expensive loan. It is not, because a loan rate is quoted per year and a factor rate applies regardless of how quickly the money is repaid.
An illustrative conversion
Using the same £20,000 advance at 1.3, suppose the holdback repays the £26,000 in eight months. A £6,000 cost for eight months of borrowing equates to roughly 45% a year on a simple basis, and higher still once you allow for the balance falling as each day's collection is made. If strong trading repays it in five months, the annualised cost rises further, because the fee stays at £6,000 whatever the speed. These figures are illustrative only and do not represent any provider's terms.
The lesson is that a quick repayment, which feels like good news, actually makes an MCA more expensive on an annual basis. Our guide on how to compare business finance offers covers putting different products on the same footing.
Stacking and the renewal trap
Stacking means holding two or more advances at the same time, often from different providers. Each one takes its own percentage of card takings, so a business with three advances might see a large share of every day's sales disappear before it reaches the bank account. Providers' terms often prohibit it, but it happens frequently because approvals are quick and checks are light.
The renewal trap is subtler. As an advance nears repayment, the provider offers a new one. Part of the new advance clears what is left of the old one, and the business receives the balance as fresh cash. It feels like a top-up. In practice the business pays a second factor rate on money that includes its own earlier fee, and the cycle resets. Businesses can repeat this for years without the underlying balance ever reaching zero.
What happens if takings fall
Lower card sales mean slower repayment, which eases the daily pressure but stretches the term and leaves the business paying the full fixed total from a smaller income. Some agreements include a minimum monthly collection or allow the provider to review the holdback percentage. Many MCA agreements for limited companies include a personal guarantee, so a shortfall can follow the director personally. See business debt and personal guarantees.
Switching card terminal provider or diverting sales to cash to reduce collections is usually a breach of the agreement and can trigger demand for the whole outstanding total. It is not a solution.
Warning signs the MCA debt is unaffordable
- More than one advance is being repaid at the same time
- The business has renewed at least once to release cash
- Supplier payments, rent or HMRC are being delayed to cover the shortfall left after collections
- The owner cannot say what the total outstanding across all advances is
- Card takings have fallen but the fixed total has not
Options for a business with MCA debt
Refinancing into a term loan
The most effective remedy, where it is available, is to repay the outstanding advances with a term loan. A business debt consolidation loan can clear several advances at once; business debt refinancing can replace a single large one. The business swaps a daily percentage of takings for a fixed monthly payment, usually at a materially lower annual cost, and regains visibility of its cash.
Providers will generally only consider this where the business is profitable before MCA costs, accounts and bank statements show the new repayment is affordable, and the number of advances is manageable. A business with four or five stacked advances and declining sales will struggle to refinance, and a provider that offers to do so at a very high rate may simply be adding another layer. A personal guarantee is normally required and the loan term may be longer than the MCA would have run, which can increase the total repaid.
Negotiating with the provider
MCA providers can sometimes agree a lower holdback percentage, a temporary pause, or a reduced settlement figure where early repayment is being funded from elsewhere. Any settlement should be confirmed in writing before funds are sent. Finance Business Debt does not negotiate with providers on a business's behalf.
Cash flow alternatives
If the original reason for the advance was a gap between paying suppliers and receiving customer payments, invoice finance or a cash flow finance facility may address that gap at a lower cost than another advance. These products suit businesses that invoice other businesses on credit terms more than retail or hospitality businesses with card-based income.
When to get free or professional help
If collections are leaving the business unable to pay wages, rent or HMRC, contact Business Debtline for free, impartial help. Where the company cannot pay its debts as they fall due, directors should speak to a licensed insolvency practitioner before taking any further advance or loan, because borrowing more in that position can make matters worse and may raise questions about directors' duties. Finance Business Debt provides information only and does not give insolvency or debt advice.
Frequently asked questions
Is a merchant cash advance a loan?
Legally it is usually structured as a purchase of future card receivables rather than a loan, which is one reason the cost is quoted as a factor rate. For a business deciding whether it can afford it, the distinction matters less than the total to be repaid and how quickly it will be collected.
Can I repay an MCA early to save money?
Repaying early does not reduce the fixed total unless the provider agrees a discount. Some providers offer a reduced settlement figure; many do not. Ask for the figure in writing before arranging funds.
Will a term loan provider refinance several stacked advances?
Sometimes, if the business is profitable and the combined repayment is clearly affordable. The more advances there are and the weaker the trading, the fewer providers will consider it. Settlement figures for every advance will be needed.
What if I stop my card terminal to halt collections?
This is normally a breach of the agreement. The provider may demand the full outstanding total immediately and pursue any personal guarantee. Speak to a free advice service before taking any step like this.
Does Finance Business Debt provide merchant cash advances?
No. We explain the options and, where appropriate and at your request, may introduce you to third-party finance providers. See our regulatory information.