Merchant cash advance – loans tied to future sales

A merchant cash advance allows you to borrow against future sales.

This type of finance is relatively new to Australia, but is growing in popularity.  It can work well for businesses in the retail or food sectors which have difficulty raising funds from traditional sources.

Here’s an example of how it works:

A restauranteur needs money to redecorate her restaurant.

Her EFTPOS and credit card sales demonstrate that she earns a consistent income and,  based on that income,  a finance company agrees to lend her $10,000 secured by her future sales.

Set Fee

Rather than an interest rate, the financier will charge the restauranteur a fee based on the amount advanced and however long they agree it should take to be repaid.

The fee can range between 20% and 30% of the loan amount.  Let’s say, she agrees to repay the $10,000 over 10 months.  Her total repayments could be $13,000

The merchant cash advance is repaid out of the restaurant’s daily EFTPOS and credit card takings with a small percentage going into the lender’s account.

This makes the facility quite attractive to some retailers because the small daily repayments are “painless” compared with a monthly lump sum.

Benefit

A significant benefit is that repayments are determined by sales.  When sales are low, repayments are low and vice versa.

Obtaining a merchant cash advance is very “low doc” with little or no requirement by the lenders to see financials.  Primarily,  lenders will want evidence that you have consistently strong sales and have been at your premises for a long time.

In terms of collateral, future sales will satisfy most financiers although some may ask for property security if the advance is sizable.

Drawbacks

It’s expensive compared with more traditional forms of finance.  You need to do your sums to ensure you generate the business required to make repayments.