Merchant cash advances: how they work, what they really cost, and when they make sense
Sterling's take A cash advance is quick and flexes with your takings, but a 1.35 factor over 6 months is about 126% APR. Use one when the money earns more than that, and not otherwise.
Want a straight answer for your business?
See who'll fund meA merchant cash advance gives your company a lump sum now in exchange for a share of its future card takings. You repay a fixed total, set by a factor rate, through a percentage taken from each day's card sales. It's fast and it slows down when trade slows down, but it's usually one of the most expensive ways to raise money, so convert it to an APR before you say yes.
What it is, and what it isn't
The British Business Bank describes a merchant cash advance as an upfront payment in exchange for a portion of your future daily credit and debit card receipts, instead of a loan.
That legal shape matters. Merchant cash advances are not loans and are not FCA-regulated. There's no interest rate, no APR on the paperwork and no regulator setting how the cost is shown to you. You get a factor rate and a holdback percentage, and the arithmetic is left to you.
Two versions are common:
- Holdback (split) advances. Your card terminal provider or the funder takes a fixed percentage of each card sale until the total is repaid.
- Fixed-debit advances. A set amount leaves your bank account every business day or every week, regardless of takings. These behave much more like a short loan.
How the cost works
Factor rate is the fixed multiple you pay back, like 1.35. Multiply the advance by it and you have the total. The British Business Bank says repayment periods typically run from 3 to 18 months, and that a typical deduction can be around 10% of each card sale.
Worked example. £50,000 at a 1.35 factor, repaid over 6 months by daily debits:
- Total repaid: £67,500
- Cost: £17,500
- 126 business-day payments of £535.71
- APR on the £50,000 you receive: about 126%
If the provider deducts a £2,500 fee from the advance, you receive £47,500 but still repay £67,500. The cost becomes £20,000 and the APR rises to about 149%.
The term changes everything. The factor rate stays put, but the APR moves with how fast you repay. Using £10,000 at each factor, paid daily:
| Factor | Over 3 months | Over 6 months | Over 12 months | Over 18 months |
|---|---|---|---|---|
| 1.15 | 112.9% | 56.9% | 28.5% | 19.0% |
| 1.25 | 183.2% | 92.2% | 46.3% | 30.9% |
| 1.35 | 250.2% | 125.9% | 63.2% | 42.1% |
| 1.45 | 314.5% | 158.2% | 79.3% | 52.9% |
Why a holdback makes the term a moving target
With a holdback there's no fixed end date. The advance runs until the percentage of your card takings adds up to the total. A rough estimate: months to repay ≈ total repaid ÷ (monthly card takings × holdback).
Take the £50,000 at 1.35 (£67,500 to repay) with a 10% holdback:
- £112,500 a month in card takings → £11,250 a month → about 6 months → about 126% APR.
- Takings double to £225,000 → about 3 months → about 250% APR.
- Takings halve to £56,250 → about 12 months → about 63% APR.
Busy months make the advance cost more per year, not less. Sterling's take: the flexibility is real, but you pay for it when trade is good.
Who a cash advance suits
- Card-heavy businesses: restaurants, cafés, retail, hospitality, salons.
- A short, specific use that pays back fast: stock ahead of a peak, an urgent repair, a deposit on a bulk buy at a discount.
- Companies a bank has turned down on timing or security, which can carry the cost.
Who it doesn't suit
- Anyone covering losses or a long-term shortfall.
- Low-margin businesses. If your margin is 8%, money costing 100%+ a year has to earn its keep very quickly.
- Businesses that mostly take bank transfers or invoice on credit terms. Look at invoice finance instead.
- Companies already running two advances.
What funders look at
- Card takings history. Usually several months of merchant statements and bank statements, to see the level and the dips.
- Companies House. Trading age, filed accounts, directors, and any charges already registered against the company.
- Existing advances. Other funders' daily debits show on your bank statements. Hiding one tends to end the application.
- CCJs and defaults, both for the company and often for the directors.
- Personal guarantees. Many providers ask a director for a personal guarantee. Read exactly what it covers before you sign.
Red flags
- The offer quotes a factor rate but not the term or the daily amount.
- Fees deducted from the advance before it lands.
- "Renewal" offers that roll your unpaid balance into a new, larger advance and charge the factor rate again on money you already owed.
- A clause banning you from steering customers towards cash or bank transfer. The British Business Bank notes that encouraging cash payments can be treated as a breach.
- No written answer on early settlement.
Five questions to ask before you sign
- How much lands in my account after every fee?
- What is the total I repay, and what is the daily or weekly amount?
- If it's a holdback, what percentage, and is there a minimum monthly amount?
- Does settling early reduce the total, and is that in the agreement?
- What exactly does the personal guarantee cover, and when can it be called?
Put the answers to the first two into the MCA APR calculator and you have a number you can compare with any loan.
Cash advance vs the alternatives
| Merchant cash advance | Revolving credit facility | Business loan | Invoice finance | |
|---|---|---|---|---|
| Legal form | Purchase of future takings | Borrowing | Borrowing | Advance against invoices |
| Cost shown as | Factor rate | Interest rate plus fees | Interest rate plus fees | Service fee plus discount charge |
| Repayment | Share of card sales or fixed debits | Flexible, on drawn balance | Fixed instalments | When customers pay |
| Paying early saves money | Often no | Yes | Depends on the agreement | Yes |
| Speed | Often quick | Often quick once set up | Slower | Slow to set up, then quick |
Run your own numbers: Factor rate to APR converter
Estimated APR
125.9%
Very expensive.
- You receive
- £50,000
- You pay back
- £67,500
- Cost of the money
- £17,500
- Cost per £1 received
- £0.35
- 126 daily payments of
- £535.71
- Effective annual rate
- 251.1%
An estimate on the money you actually receive, with daily payments counted as 21 business days a month. Not an offer and not a lender's disclosure.
Ready for a straight answer?
Two minutes of questions. One funding specialist. No impact on your credit score.
Questions owners ask
Is a merchant cash advance a loan?
No. It's a purchase of a share of your future card takings at a discount. Merchant cash advances are not loans and are not FCA-regulated.
What is a holdback?
The holdback is the percentage of each day's card takings that goes to the provider until the agreed total is repaid. A higher holdback clears the advance faster, which pushes the APR up.
Does paying early save money on a cash advance?
Often not. The total is fixed by the factor rate when you sign, so unless the agreement offers an early settlement discount in writing, paying early just means paying the same amount sooner.
Why does my cash advance APR look so high?
Because the fee is fixed and the term is short. £3,500 on £10,000 over 6 months is about 126% APR; the same fee over 12 months would be about 63%.
Can I take a second cash advance?
Some providers will offer one, but each new advance takes another slice of your takings. Two running together can squeeze cash flow hard, and many funders won't add a third.