Merchant cash advance rates: what a cash advance actually costs

A merchant cash advance is not structured as a loan. The funder buys an agreed slice of your future card sales at a discount, and you deliver those sales by letting a percentage of every card transaction be taken at source until the agreed amount has been remitted. Because the transaction is a purchase of receivables rather than a credit agreement, the pricing convention follows the purchase: a fixed sum bought for a fixed price.

That is what a factor rate expresses. If a funder advances 20,000 pounds at a factor rate of 1.25, it has bought the right to receive 25,000 pounds of your card takings. The 5,000 pound difference is its margin. It is not interest, it does not accrue, and it does not increase if the sales come in slowly. It was set the moment you signed.

The practical consequence is that a merchant cash advance has no natural annualised rate. An interest rate is a price per unit of time; a factor rate is a price per unit of money. Converting between the two requires an assumption about how long repayment will take, and that assumption is exactly what nobody can pin down in advance, because it depends on how much you trade. We cover the conversion in detail on our page on factor rate versus APR.

Every merchant cash advance quote reduces to three figures. Get all three in writing before you go any further, because a quote with only one of them is not a quote.

• The advance. The lump sum paid into your account. UK funders typically advance between 5,000 and 500,000 pounds, and the offer is usually anchored to your monthly card turnover. One month of card takings is a common starting point, with well established, high volume merchants sometimes being offered more.
• The factor rate. The multiplier that fixes the total repayable. Typically 1.1 to 1.5. Multiply the advance by this number and you have the whole obligation.
• The holdback. The percentage of each day's card settlement that is diverted to the funder, typically 5% to 20%. This is sometimes called the split percentage or the retrieval rate. It determines how quickly the advance clears, and therefore what the money really costs you per year.

A fourth figure is worth chasing even though it is an estimate rather than a term: the funder's expected repayment period, usually quoted as a range. Most UK advances are structured to clear in roughly 4 to 18 months. If a funder will not put an expected window in writing, treat that as a signal about how confident it is in the holdback it has set.

There is no published rate sheet in this market and no two funders price identically, so any range you see, including ours, should be read as a description of the field rather than a quotation. Broadly, the UK market divides into three bands.

We would treat anything quoted above 1.5 as a prompt to stop and look at alternatives to a merchant cash advance rather than as a rate to negotiate down. At that level the cost of the money starts to compete with the margin on the trade it is funding.

The clearest way to read merchant cash advance rates is to price the same advance at three different factor rates. Here is 20,000 pounds at the bottom, middle and top of the usual band.

The arithmetic is deliberately unglamorous: advance multiplied by factor rate equals total repayable, and the difference is the cost. Nothing in that calculation refers to time, which is why the gap between 1.15 and 1.40 looks like a 25 percentage point difference and nothing more. It is only when you introduce the repayment period that the real spread appears. You can run your own figures through our merchant cash advance calculator.

This is the part of merchant cash advance pricing that we think is most often glossed over. Take the middle example above, 20,000 pounds at a factor rate of 1.25, so 25,000 pounds repayable and 5,000 pounds of cost. That 5,000 pounds does not move. What moves is how long you have the funder's money.

A business paying 5,000 pounds for six months of funding is paying roughly three and a half times the annualised price of a business paying the same 5,000 pounds across eighteen months. Neither of them was quoted a different rate. The only variable was trade.

It works in the other direction too, which is the point most cost comparisons miss. A factor rate of 1.15 cleared in six months works out at around 63% on an APR equivalent basis. A factor rate of 1.40 stretched across eighteen months works out at around 57%. The apparently cheaper headline rate is the more expensive deal. This is why we argue that a factor rate on its own is not a price, and why the holdback deserves as much scrutiny as the rate itself.

Funders price merchant cash advances off card data far more than off traditional credit assessment, which is why businesses that struggle to pass a bank's affordability test often get an offer here. The main inputs, in roughly the order they matter:

• Monthly card turnover and its consistency. Twelve months of steady takings prices better than twelve months of the same total arriving in three spikes. Volatility is repayment risk, and repayment risk is the factor rate.
• Trading history. Most funders want at least six to twelve months of card processing. Less than that, and you are priced at the top of the band if you are funded at all.
• Advance size relative to turnover. Asking for one month of card takings prices very differently from asking for two and a half. The bigger the multiple, the higher the holdback needed, and usually the higher the rate.
• Sector. Hospitality, retail and personal care are the natural home of this product because card takings are daily and predictable. Sectors with long gaps between transactions price worse.
• Whether the funder already sees your data. An advance from your card acquirer or payments platform is underwritten against settlement records it holds directly. That reduced uncertainty often shows up in the rate.
• Credit profile and outstanding advances. Adverse credit does not automatically disqualify you, but it moves the rate. An existing advance being repaid by another funder moves it further, and stacking advances is where this product does most of its damage.

Personal guarantees are common on merchant cash advances, particularly for newer or smaller merchants. A guarantee will not usually reduce the factor rate much, but it may unlock a larger advance. Read what you are signing.

The headline promise of a merchant cash advance is that the factor rate is the cost and there is nothing else. In our experience that is true more often than not, but it is not universal, and the exceptions are worth hunting for before you sign.

• Arrangement or set up fee. Some funders charge one, usually a small percentage of the advance, and either deduct it from the sum paid out or add it to the total repayable. A 2% arrangement fee on 20,000 pounds at factor 1.25 turns a 25% cost into roughly a 27% cost. Ask which way it is applied.
• Broker commission. If you came through an introducer, the commission is generally built into the factor rate rather than invoiced separately. Ask what it is. A funder that will not disclose it is telling you something.
• Card terminal switching. Some advances require you to move to a particular acquirer so the split can be taken at source. That can be neutral, or it can quietly change your transaction charges for years. Price the terminal deal alongside the advance.
• Shortfall or minimum payment terms. A minority of agreements set a floor: if the holdback has not delivered a certain amount within a set period, a top up payment falls due. This converts a flexible product into something much closer to a fixed obligation, and it is the single clause we would most want to see before signing.
• Default and legal recovery costs. These sit in the agreement even where they are unlikely to bite. Know what triggers them.

Usually not, and this catches people out. Because the total repayable was fixed on day one, clearing the advance in four months rather than nine does not reduce what you owe. It reduces the time over which you pay it, which increases the effective annualised cost rather than lowering it. A business that has a strong quarter and pushes 25,000 pounds through in five months has paid the same 5,000 pounds it would have paid over twelve, for less than half the use of the money.

Some funders do offer an early settlement discount, sometimes framed as a rebate of part of the factor or as a reduced settlement figure if you clear the advance inside a defined window. Where it exists it can be worth real money, particularly on the higher factor rates. It is not a market standard, it is rarely on the front page of the offer, and it is almost never volunteered. Ask the question directly: if I settle in full at month four, what is the figure?

The related question, whether you can settle early at all, is usually yes, but check for administration charges on early settlement. A discount that is offset by a settlement fee is not a discount.

Read purely as a cost of capital, a merchant cash advance is expensive relative to most secured and many unsecured alternatives. A cost of 25% of the advance is not competitive with a bank term loan, an asset finance agreement or a well priced invoice finance facility, and we would not pretend otherwise.

What the rate buys, though, is not just money. It buys speed, it buys access for businesses that would fail a conventional affordability test, and above all it buys a repayment profile that flexes with trade. In a quiet January the remittance falls because the takings fall. A fixed monthly loan repayment does not care what January was like. For a seasonal business, that difference has a real value that no comparison of headline rates captures.

The honest framing, then, is that the rate should be judged against what the money is doing. Funding stock that turns at a 60% margin inside three months can absorb a 25% cost of capital comfortably. Plugging a hole in overheads at the same cost usually cannot. We work through that judgement on our page comparing a merchant cash advance with a business loan.

A merchant cash advance made to a limited company is generally an unregulated commercial agreement. It is a purchase of future receivables rather than credit, so it falls outside the Financial Conduct Authority's consumer credit perimeter and outside the Consumer Credit Act. Sole traders and some small partnerships can fall within that perimeter depending on the size and purpose of the agreement, in which case additional protections and disclosure requirements may apply.

The direct consequence for pricing is that there is no obligation on the funder to quote an APR, no standardised cost disclosure and no prescribed pre contract information of the kind a consumer would receive. That is not a scandal, it is the ordinary position for commercial finance, but it does shift the work onto you. Nobody is going to hand you a comparable annualised figure. You have to build it, which is what the tables above are for.

If you take one thing from this page, make it the checklist. For each offer, get these on a single sheet before you compare anything:

• The advance, the factor rate and the total repayable in pounds.
• The holdback percentage, and whether it is fixed or can be adjusted later.
• The funder's expected repayment period, as a range.
• Every fee, and whether it is deducted from the advance or added to the total.
• The early settlement position, in writing.
• Whether any minimum payment or shortfall clause applies.
• Whether a personal guarantee is required.
• Whether you have to change card terminal or acquirer, and what that does to your transaction charges.

Then do the one calculation the quote will not do for you: divide the total repayable by the expected monthly remittance to get a term in months, and use that to convert the cost into an annualised figure. Two offers with the same factor rate and different holdbacks are two different prices. Our page on what a factor rate is sets out the formula, and if you want to sanity check whether you would qualify before you start collecting quotes, the merchant cash advance eligibility criteria are a reasonable place to begin.