Can I repay a cash advance early, and will it save me anything?

Usually yes, you can repay a merchant cash advance early, but on most agreements it does not save you anything. The total repayable is fixed on the day you sign (the advance times the factor rate), so paying it off sooner means paying the same pounds faster. The only way early repayment saves money is if your contract includes a settlement discount, or the funder agrees one in writing.

Why early repayment rarely saves money

On a loan, interest runs on the balance. Repay early and the balance disappears, so the interest stops. On a cash advance there is no balance accruing interest. You agreed to repay a fixed total, for example £13,500 on a £10,000 advance at a 1.35 factor rate.

Repay that over the planned 6 months of daily payments and it costs about 126% APR. Clear it in 3 months and you still pay £13,500, which works out at about 250% APR. Same pounds, much higher annual cost.

Your legal position

Consumers with a regulated credit agreement have a statutory right to settle early: section 94 of the Consumer Credit Act 1974 lets "the debtor under a regulated consumer credit agreement" discharge the debt early by notice and payment.

A merchant cash advance to a limited company is not a regulated consumer credit agreement, so that statutory right does not apply. Your rights are whatever the contract says. This is Ask Sterling's understanding, not legal advice.

What to ask for before you sign

• Is there an early settlement discount? If yes, how is it calculated, and is it in the contract?
• Is the discount automatic or at the funder's discretion? Discretionary discounts are worth little.
• What does refinancing with another funder mean? Some agreements treat it as early settlement, some restrict it.
• Are there fees on top of the total for settling early? There should not be, but check.

Sterling's take: the time to negotiate an early settlement discount is before you need the money, because after you sign you have no leverage.

When early repayment does make sense

• Your contract has a real discount. Then work out the saving in pounds and compare it with what the cash could do in the business.
• You need the facility clear. For example, a new funder will only lend once the advance is settled.
• The advance is restricting you. A holdback taken from card takings can squeeze cash flow; clearing it frees every day's takings.

If you are thinking of clearing an advance with new money, that is a refinance. Read how do I refinance a cash advance first, because you could end up paying the remaining cost of the old advance plus the full cost of the new one.

What to do next

Ask your funder for a written settlement figure and the date it is valid to. Run the original offer through the MCA APR calculator at the planned term and at your early-repayment term so you can see the difference. Then read the merchant cash advance guide for the clauses worth checking next time.