A cash advance is a type of lending based on your business’s future revenue. 

It’s different to a conventional business loan: instead of having an outstanding loan amount, interest rate, and term, a cash advance sells future sales to the lender at a discount. The term ‘advance rate’ is used instead of ‘loan amount’.

Cash advances are designed for companies and organizations that take card payments from customers. The business borrows a sum of money which it repays through a percentage of its customer card payments. 

Cash advances are best suited to small businesses looking for a cash injection within 24 hours. 

With a standard business loan, you get a principal lump sum at the start of the term and then pay interest for as long as that amount is owed. This concept applies to loans, overdrafts, revolving credit facilities, and lots of other types of finance. 

In fact, most of the common forms of finance work on this principle.

The total cost of the finance – i.e. the interest you pay on top of the principal lump sum – varies depending on how long you take to pay back the loan. 

Cash advances turn this idea on its head. Instead of having interest constantly ‘running’, the total cost of finance is agreed upon up-front. So instead of a monthly interest calculation, there’s a fixed finished line you need to get to. 

Here’s how it works in detail:

• Merchant cash advance example
• Cash advance amount: £10,000
• Amount repayable: £12,500
• Monthly repayment percentage: 20%
• Customer 1 pays £10; you keep 80% (£8) and the lender gets 20% (£2)
• Customer 2 pays £129.99; you keep 80% (£103.99) and the lender gets 20% (£26)
• Customer 3 pays £450.96; you keep 80% (£360.77) and the lender gets 20% (£90.19)

Like most short-term business loans, you are entitled to use the funds how you please – as long as it is solely for use in the business and not for personal expenses. Here some examples of expenses you might use your cash advance for:

Unexpected repairs or renovations

• Stock
• Working capital
• Emergency expenses
• Equipment upgrade
• Website development
• Technology upgrade
• Machinery 

Business borrowers don’t have to navigate fixed monthly payments as they would with a traditional business loan. Every time a customer uses the card machine, a percentage is automatically transferred to the lender. The more money the business earns through card payments, the quicker it pays off the cash advance. 

Of course, it works the other way around too.  

Merchant cash advances usually range from 80 to 90% of your monthly turnover.

Flexibility – Your business only pays back the finance when it takes customer card payments, and repayments correspond with your sales.

Speed – Depending on the lender and application process, you can get approved for a merchant cash advance within just 24 hours. 

Unsecured – Merchant cash advances are a type of unsecured business finance, meaning you don’t need to secure it with business assets. 

Application Ease – When applying for a conventional loan, traditional lenders may require a business plan – merchant cash advance lenders don’t.

Risk – As the repayments are automatically taken from the money you receive from card payments, there can be less risk of ‘defaulting’ on your loan.

Transparency – The total amount you pay back doesn’t change; the lender will tell you what the total cost is when you take out the cash advance.