Merchant Cash Advance & Revolving Credit
Two flexible ways of funding short-term business cash requirements, but with very different methods of access and repayment.
A revolving facility may suit a business that needs to draw and repay funding repeatedly. A merchant cash advance is more closely linked to future card sales.
Merchant cash advance and revolving credit solve different cash-flow problems.
A business may need additional cash for stock, payroll, marketing, seasonal expenditure or an unexpected short-term requirement. The funding need may be similar, but the way the facility operates can be very different.
With revolving credit, a business is normally given access to an agreed limit. It can draw funding when required and, subject to the facility terms, reuse availability after borrowing has been repaid.
A merchant cash advance provides an upfront amount to a business that takes debit or credit card payments. Repayment is then linked to a percentage of future card receipts until the agreed amount has been repaid.
The choice should therefore be based on the business’s cash-flow pattern, sales mix, expected use of the facility and total funding cost.
How the two facilities differ.
| Feature | Revolving credit facility | Merchant cash advance |
|---|---|---|
| Access to funds | Draw as required up to an agreed available limit, subject to the facility terms. | An agreed amount is advanced to the business upfront. |
| Repayment | Repayment arrangements depend on the provider and facility, with interest and fees generally linked to borrowing used. | Repayment is normally linked to an agreed percentage of future debit and credit card receipts. |
| Reuse | Repaid borrowing can normally become available to use again while the facility remains in place. | The original advance is repaid rather than continually redrawn from an agreed revolving limit. |
| Card sales | A business does not ordinarily need to rely primarily on card turnover for repayment. | Regular card receipts are central to the structure. |
| Cash-flow effect | The business chooses when to draw within the agreed facility and repays under the agreed terms. | Repayment moves with card receipts because an agreed share is deducted from future sales. |
| Typical use | Recurring, seasonal or irregular short-term cash requirements. | Short-term funding for businesses generating substantial card turnover. |
| Cost comparison | Consider interest, arrangement fees, utilisation terms and any other facility charges. | Consider the advance, total agreed repayment, fees and the proportion of card receipts being committed. |
Useful where the amount needed changes through the trading cycle.
A revolving credit facility can give a business access to funding without having to borrow the entire agreed limit on day one.
That can be useful where the requirement rises and falls. A business might draw funding ahead of a seasonal purchase, repay it after customer receipts arrive and draw again later when another short-term requirement arises.
The British Business Bank describes revolving credit as flexible funding that can be drawn when required and used again after repayment under the terms of the facility.
Further information is available from the British Business Bank guide to revolving credit facilities .
A revolving facility may suit
- Seasonal cash requirements
- Short-term stock purchases
- Supplier payments
- Temporary payroll pressure
- Marketing or growth expenditure
- Unexpected operating costs
- Businesses wanting reusable availability
- Cash requirements that rise and fall rather than remain fixed
Repayment follows card sales rather than a conventional fixed loan schedule.
Merchant cash advance is aimed at businesses that regularly receive debit and credit card payments.
A provider advances an agreed amount and receives an agreed share of future card sales until the repayment obligation has been met. When card receipts are higher, the amount deducted is higher. When receipts are lower, the cash amount deducted normally falls with them.
This can make the structure attractive to card-led businesses with variable trading patterns, but the total funding cost still needs careful comparison with other available forms of business finance.
The British Business Bank provides further guidance on merchant cash advances .
Businesses commonly suited to card-linked funding may include
- Retail
- Hospitality
- Restaurants and cafés
- Leisure businesses
- Health and beauty businesses
- Other consumer-facing businesses with regular card receipts
What might short-term flexible funding be used for?
Stock
Purchasing inventory ahead of expected sales or a seasonal trading period.
Cash-flow timing
Covering a short period where operating payments fall before expected customer receipts.
Marketing
Funding a defined campaign where the business expects the expenditure to support future sales.
Refurbishment
Smaller business-premises improvements or fitting-out costs where the funding term remains appropriate.
Unexpected costs
A temporary operating requirement that cannot comfortably be met from current cash reserves.
Growth
Short-term funding to support increased trading where the underlying business remains cash generative.
What a funder is likely to look at.
Fast access to finance does not mean the underlying trading position is irrelevant.
Turnover
Historic sales, recent trading and whether revenue is stable, growing or under pressure.
Cash flow
Bank-account conduct, recurring commitments and whether the proposed repayment remains manageable.
Card receipts
Particularly important for an MCA, including historic transaction volume and consistency.
Existing borrowing
Loans, overdrafts, other advances, asset finance and commitments already being serviced.
Trading history
Length of time established, recent performance and evidence that the business model is functioning.
Purpose
Why the funds are needed and whether short-term finance is appropriate for that purpose.
Credit profile
Business and, where relevant, director credit history and financial conduct.
Affordability
Whether the business can absorb repayments without creating a larger cash-flow problem.
Compare the total repayment and cash-flow effect, not only how quickly the money is available.
Flexible short-term finance can be useful precisely because it can respond to a business requirement quickly. That convenience still has a price.
For revolving credit, the comparison should include the interest charged on borrowing used, facility or arrangement fees and any other charges attached to keeping or using the facility.
For a merchant cash advance, the business should understand the amount advanced, the total amount expected to be repaid, the percentage of card receipts deducted and how that deduction will affect day-to-day cash flow.
A facility can be easy to access and still be expensive. The useful comparison is the total cost, the repayment burden and whether the business receives enough value from the capital to justify that cost.
The funding requirement is likely to occur more than once.
- The business wants reusable availability
- Cash requirements rise and fall
- Funding is needed only when circumstances require it
- Card turnover is not the main source of business income
- The business wants control over how much of the facility is drawn
Card receipts provide a natural repayment mechanism.
- The business receives substantial card payments
- Sales fluctuate during the week or year
- The business needs a defined upfront amount
- Repayments linked to trading receipts are commercially useful
- The total funding cost remains acceptable relative to the intended use
Short-term funding should not create a permanent cash-flow problem.
The business is already over-borrowed
Another facility can make immediate liquidity look better while increasing the amount of future cash already committed to debt.
The requirement is permanent
Repeated short-term borrowing may be unsuitable where the business has a structural funding shortage rather than a temporary working-capital need.
Repayments consume too much trading cash
Funding that reduces available cash too aggressively can make normal operating expenditure more difficult to meet.
Cost is not understood
Comparing only the amount received can obscure the true cost of the facility.
Long-term assets are being financed short
A short-term flexible facility may be a poor match for expenditure expected to produce returns over several years.
The underlying trading problem remains
Finance is unlikely to correct persistently weak margins or a business that continually spends more cash than it generates.
What we need to understand the requirement.
Before comparing products, we need to establish why the money is required and how the business expects to support the repayment.
- Business activity
- Trading history
- Recent turnover
- Latest accounts
- Management figures where available
- Recent business bank statements
- Card-turnover history where relevant
- Existing borrowing
- Amount required
- Purpose of funds
- Expected duration of the requirement
Understand the requirement, compare the structures, test the cost and then consider providers.
Understand
Establish why the funding is required, how much is needed and how the business generates cash.
Compare
Decide whether reusable credit or funding linked to card turnover better matches the need.
Test
Consider total cost, repayment burden, existing borrowing and the effect on operating cash.
Present
Approach appropriate providers once the required structure and supporting information are clear.
Another working-capital structure may be more appropriate.
Merchant cash advance and revolving credit are only two possible ways to fund short-term business requirements. The source of the cash gap may point towards invoice finance, trade finance, asset finance or another facility.
Merchant cash advance and revolving credit questions
What is a revolving credit facility?
A revolving credit facility gives a business access to an agreed amount of credit that can be drawn when required. Subject to the facility terms, repaid amounts can normally become available to use again.
What is a merchant cash advance?
A merchant cash advance provides a business with an upfront amount that is repaid using an agreed proportion of future debit and credit card receipts, together with the provider’s agreed funding cost.
What businesses can use a merchant cash advance?
It is principally designed for businesses that regularly accept debit and credit card payments, such as retailers, hospitality businesses and other consumer-facing companies.
Can revolving credit be used more than once?
Generally yes, while the facility remains available and subject to its terms. Amounts repaid can normally restore availability up to the agreed credit limit.
Which is cheaper: merchant cash advance or revolving credit?
There is no universal answer. The comparison should include the total funding cost, fees, amount used, repayment profile and the effect each structure has on business cash flow.
When might neither be appropriate?
Neither may be suitable where the business has a long-term structural funding problem, insufficient cash generation or needs to finance an asset that requires a much longer repayment period.
Discuss the right short-term funding structure for your business.
Tell us what the money is required for, how much is needed, current turnover, card sales where relevant, existing borrowing and how long the requirement is expected to last.
We can then compare the available structures rather than starting with whichever product happens to be easiest to obtain.
This page provides general information about business finance and does not constitute personal financial advice or a commitment to provide funding. EAS Finance is a trading name of Elite Admin Services Ltd (FRN 1044838), an appointed representative of White Rose Finance Group Ltd (FRN 630772), authorised and regulated by the Financial Conduct Authority. EAS Finance is a credit broker, not a lender. Product availability, funding costs and terms depend on the business, provider and individual transaction.