Key points
- Retail cash flow turns on the gap between paying for stock and selling it, often three to six months for seasonal lines.
- Rent quarter days and business rates are large, fixed outgoings that do not move with sales.
- Merchant cash advances are widely sold to retailers because card takings are easy to collect, but they are expensive and easy to stack.
- Refinancing advances into a term loan may lower the monthly outgoing, though a longer term increases the total repaid.
How retail cash flow actually works
A retailer is paid at the point of sale, and card acquirers settle to the bank within days, less fees. The difficulty is on the other side of the ledger. Stock is bought ahead of demand: a gift shop pays for Christmas lines in the autumn, a fashion retailer commits to spring the previous year. Suppliers may offer 30 or 60 days of credit, but smaller retailers are often asked for pro forma payment, meaning payment before dispatch. The cash goes out long before the shelves clear.
Commercial leases in England and Wales traditionally fall due on the quarter days, 25 March, 24 June, 29 September and 25 December, with a quarter's rent paid in advance. Business rates, the property tax on non-domestic premises, are usually paid in ten monthly instalments from April. Add staff, utilities and card fees, and a retailer carries a heavy fixed-cost base against sales that may be concentrated into a few weeks of the year.
Margins are thin. After cost of goods, rent, rates, wages and fees, many independent retailers keep a small percentage of each sale, and returns, markdowns and shrinkage eat into that further. Online retailers avoid shop rent but pay marketplace commissions, advertising, fulfilment and a higher returns rate, so the cost structure differs without being lighter.
Why merchant cash advances are so common in retail
A merchant cash advance, or MCA, is a lump sum repaid through a fixed percentage of daily card takings until an agreed total has been collected. Providers like retail because card turnover is visible and collected automatically through the acquirer. Retailers like the speed and the absence of fixed monthly payments.
The cost is a factor rate, for example 1.3, meaning £10,000 advanced is repaid as £13,000. A factor rate is not an annual percentage rate, and an advance repaid in six months carries a very high annualised cost. A good season repays it quickly and leaves the retailer looking for another one to fund the next season's stock. That cycle is how stacking begins. Our merchant cash advance debt page explains the warning signs and the way out.
Finance options that fit the sector
Working capital and stock finance
Working capital finance is designed for the retail problem: buying stock now to sell later. Some providers offer stock finance specifically, advancing a proportion of the cost of saleable stock, with terms matched to the selling cycle so the facility is repaid as stock turns into cash rather than through a daily share of takings.
Revolving credit
A revolving credit facility sets a limit that can be drawn, repaid and drawn again, which suits quarterly rent and seasonal buying better than a lump-sum loan. Interest is usually charged only on the amount drawn, although a facility fee may apply regardless. The risk is that the limit becomes a permanent overdraft in all but name; see business overdraft debt.
Refinancing an MCA into term debt
Where advances are taking a large daily share of takings, refinancing the balance into a term loan with fixed monthly payments can restore breathing room. The provider will want the payment to be affordable from normal trading, not just the Christmas peak, and will usually require a personal guarantee. Early settlement of an MCA may not reduce the agreed total, so check the figure first.
Consolidation
A retailer carrying an MCA, an overdraft, a supplier plan and a credit card may benefit from consolidating these into one facility with one payment planned around quarter days. A longer term lowers the monthly figure but increases the total interest paid, and cleared card and overdraft limits must not be re-used for stock without a plan to repay them.
An illustrative retail example
A homeware shop has two advances collecting a combined 18 per cent of daily card takings, an overdraft at its limit and a supplier on a payment plan. In a quiet month the daily collections leave too little for rent. Refinancing both advances and the overdraft into one three-year term loan might replace the daily deductions with a fixed monthly payment lower than the current average outgoing. The total repaid could be higher than the advances would have cost if cleared quickly, and the owner would be asked for a personal guarantee. These figures are illustrative and not an offer or quote.
Risks specific to retail borrowing
- MCA stacking. A second advance while the first is running adds to the daily deduction, and most agreements prohibit it. It is the fastest way retail debt becomes unmanageable.
- Overdraft reliance. An overdraft used for stock every year is a long-term loan at an overdraft rate, and banks can reduce limits with little notice.
- Lease liabilities. The remaining rent commitment often dwarfs other borrowing, and smaller retailers commonly guarantee the lease personally.
- A season that disappoints. Stock finance sized on last year's sales can leave unsold goods and a facility to repay if footfall changes.
- Business rates arrears. Councils can pursue rates quickly through the magistrates' court. Treat rates as a priority debt and speak to the council early.
Questions to ask before borrowing
- Will this facility be repaid by the stock it funds, or will I still owe money after the season ends?
- What is the total cost in pounds, and what is that as an annual rate rather than a factor rate?
- Can I afford the repayment in my three quietest months, not just my best ones?
- Have I included the lease, rates and my personal guarantees in the full picture of what is owed?
If repayments are already being missed, read our page on business loan arrears and contact Business Debtline, which offers free, impartial help, before taking on anything new.
Frequently asked questions
Can a retailer refinance a merchant cash advance?
Often, yes, if the fixed repayment is affordable from normal trading. The provider will usually settle the advance directly. Check the settlement figure first, because some advances do not reduce the total repayable for early settlement.
Is stock finance the same as a loan?
It is borrowing, but sized and timed around the stock it funds, and the provider may take security over the stock. It is usually repaid as the stock sells rather than through fixed instalments over years.
Do online retailers have different finance options?
Mostly the same products, although some providers offer revenue-based finance repaid from marketplace receipts, which works like a merchant cash advance. Watch advertising spend and returns rates as closely as a shop watches rent.
Can I borrow to pay business rates or a rent quarter?
Short-term facilities exist for this, but borrowing for a recurring fixed cost suggests the cost base needs looking at. Ask the landlord about monthly rent and the council about a rates instalment plan first.