Merchant cash advance examples: three businesses, three sets of numbers

Before the examples, the shape of the calculation. A funder advances a lump sum, applies a factor rate to fix the total repayable, and then recovers that total by taking an agreed percentage of every card transaction you process until the balance reaches zero.

• The advance is what lands in your account. UK funders typically advance between 5,000 and 500,000 pounds, usually anchored to about one month of card takings.
• The factor rate, typically 1.1 to 1.5, multiplies the advance to give the total repayable. That total never changes.
• The holdback, typically 5% to 20% of daily card settlements, sets the pace. It does not affect the pound cost at all, only how long you take to pay it.

Because the total is fixed and the pace is not, the repayment period is an estimate rather than a term. Most advances are structured to clear in roughly 4 to 18 months. The examples below show what that means when you attach it to real trading patterns.

An independent cafe wants to refit its counter and buy a second coffee machine before the summer. It takes an average of 13,500 pounds a month on cards, has been trading for three years and does not want a fixed monthly repayment through the quiet weeks of the winter.

The cost calculation is done before anything is repaid: 8,000 multiplied by 1.25 is 10,000, so the cafe owes 10,000 pounds and it will owe exactly that whether the money is cleared in five months or twelve. What the 12% holdback determines is which of those it turns out to be.

Here is what the balance actually does. Card takings vary with the season and the weather, so the remittance varies with them.

Two details are worth noticing. Month three is the strongest trading month and the largest repayment, which is the whole design of the product working as intended. And month seven is not a full remittance: once the outstanding balance drops below the holdback amount, only the balance is taken. The cafe does not overpay and the advance simply ends.

The cafe paid 2,000 pounds to use 8,000 pounds for seven months. As a total cost of capital that is 25% of the advance. Annualised, allowing for the fact that the balance was falling throughout and the cafe therefore had the use of an average of roughly half the money, it works out at an APR equivalent of around 120%.

That is a large number and we are not going to soften it. Whether it was a good decision depends entirely on what the 8,000 pounds did. If the new machine and counter lifted takings by 1,500 pounds a month at a 65% gross margin, the refit was paying for itself inside three months and the 2,000 pound cost was cheap. If the money covered a VAT bill, nothing was earned against it and the cafe has simply bought seven months of breathing room for a quarter of the sum.

That is the test we would apply to every example on this page: not is the rate high, but does the thing this money buys earn more than the money costs.

A two site restaurant group needs 30,000 pounds to fit out a new kitchen line ahead of an extended menu launch. It processes around 48,000 pounds a month on cards across both sites and has four years of trading history, which puts it in a stronger pricing position than the cafe.

At 4,800 pounds a month the restaurant clears 33,600 pounds over seven months and settles the remaining 3,000 pounds in month eight. The cost is 6,600 pounds, or 22% of the advance, which annualises to an APR equivalent of around 76%.

Note what the lower holdback has done. The restaurant is taking three and a half times the cafe's card volume but has agreed a 10% split rather than 12%, which stretches the repayment across eight months rather than seven despite the much larger advance. The lower factor rate and the slower pace both push in the same direction, and the annualised cost lands well below the cafe's.

An independent homeware retailer with two shops wants 60,000 pounds to buy stock ahead of the Christmas quarter, at a discount that is only available on volume. It takes around 55,000 pounds a month on cards, but its trading history is shorter and the advance is a little over one month of card turnover, so it is priced at the expensive end of the range.

Twelve monthly remittances of 6,600 pounds clear 79,200 pounds, with the final 1,800 pounds settled in month thirteen. The cost is 21,000 pounds, or 35% of the advance, which annualises to an APR equivalent of around 76%.

The commercial question here is unusually clear cut, because stock has a measurable margin. If 60,000 pounds of stock bought at a volume discount sells through at a 55% gross margin, the trade generates something in the region of 73,000 pounds of gross profit against a 21,000 pound funding cost. If a third of it is still sitting in the stockroom in March, the arithmetic looks very different and the retailer is repaying an advance out of takings that the stock never generated.

Putting them together produces the finding we think is most useful on this page.

The retailer was quoted the worst factor rate of the three, 1.35 against the restaurant's 1.22, and ends up at the same annualised cost. The reason is that the retailer's advance is spread across thirteen months while the restaurant's clears in eight. Meanwhile the cafe, with a middling factor rate, is the most expensive of the three by a wide margin, because a small advance cleared quickly by a healthy holdback is the most expensive shape this product takes.

If you take one lesson from these examples, make it that one. The headline factor rate is a poor guide to which deal is dearest. You have to put the holdback next to it and work out the term.

The flexibility is the thing this product genuinely offers, so it is worth testing. Suppose the cafe's takings fall by around 30% from month four, to roughly 9,500 pounds a month, and stay there.

The 12% holdback now delivers about 1,140 pounds a month rather than 1,500, so the advance takes eight months to clear instead of seven, with a small final remittance in month eight. Nothing is in arrears. No payment has been missed, because there was no fixed payment to miss. The cost is still 2,000 pounds, and because the money was outstanding for longer the annualised cost falls from around 120% to around 109%.

That is a real benefit and a modest one. A fixed monthly loan repayment of the same size would not have moved, and finding it out of reduced takings is exactly how a difficult quarter becomes a default. But notice that the cafe is still handing over 12% of every card transaction during its worst trading months, and that money is not available for stock, wages or rent. Flexibility in this product means the amount adjusts, not that the pressure lifts.

Illustrations are cleaner than agreements. Before you map your own business onto any of the above, four things to check on a real offer:

• Fees on top of the factor rate. Some funders charge an arrangement fee. A 2% fee on the retailer's 60,000 pounds is another 1,200 pounds, which does not appear anywhere in the factor rate.
• Minimum payment or shortfall clauses. A minority of agreements require a top up if the holdback has not delivered a set amount within a set period. That converts the flexibility described above into a fixed obligation, which changes the product entirely.
• Terminal or acquirer switching. If taking the advance means moving your card processing, price the new transaction charges alongside the advance. They may outlast it by years.
• Personal guarantees and stacking. Guarantees are common. Taking a second advance while a first is running is where most of the harm in this market happens, because the combined holdback can take a quarter or more of every card transaction.

One point of legal structure that affects how your accountant will look at this: an advance to a limited company is generally a purchase of future receivables rather than a loan, and sits outside the Financial Conduct Authority's consumer credit perimeter. Sole traders and some small partnerships may fall within the Consumer Credit Act depending on the agreement. That distinction has consequences for how the arrangement is documented and treated, so it is worth raising with your accountant rather than assuming it is a loan.

The calculation you need takes about a minute. Multiply the advance by the factor rate to get the total repayable. Multiply your average monthly card takings by the holdback percentage to get your likely monthly remittance. Divide the first by the second and you have the term in months. Then judge the cost against that term rather than against the factor rate on its own.

Our merchant cash advance calculator runs the whole thing including the annualised equivalent, and our page on merchant cash advance rates sets out the full list of questions to put to a funder before you compare quotes. If you want to know whether you would qualify before spending time gathering offers, the usual eligibility requirements are a sensible first check. And if the numbers above have made you uneasy, that is a reasonable response: our page on the pros and cons sets out where we think this product does and does not belong.