Merchant Cash Advance

Find out more about merchant cash advances and how they work in Savvy's informative guide.

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, updated on July 14th, 2023       

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A merchant cash advance is a unique type of loan finance available to businesses that meet certain criteria. But what are they exactly, and when are they most useful? Learn about merchant cash advances, how they work, and how they compare to more traditional business loans with this helpful guide.

What is a merchant cash advance, and how does it work?

A merchant cash advance is an alternative type of business finance that works somewhat differently to a traditional loan. With a merchant cash advance, rather than repaying the loan amount in a series of regular, set value repayments at specific intervals, the lender instead takes a small percentage of your business’ cash flow (called a holdback amount) until the loan is repaid.

Because the repayments are a proportion of your cash-flow, that means your repayments vary with your cash flow – meaning if cash flow slows down, your repayments get smaller, making it easier to keep paying the bills.

With a merchant cash advance there’s no interest rate – not in the traditional sense. Rather, the amount your business owes to the lender is the amount borrowed with a payback amount added on top – a set percentage of the borrowed amount, agreed to at the beginning of the loan. This percentage varies depending on the amount borrowed and the specifics of your business, but is generally in the area of 20-40% of the loan amount. Once the lender has deducted enough from your cash flow to cover both the original loan and the payback amount, the loan is repaid.

What types of situations is a merchant cash advance suited for?

A merchant cash advance doesn’t suit every type of business. Because merchant cash advances generally deduct money from your electronic transactions, it’s generally more suited to businesses which do the majority of their trade via EFTPOS or credit. Businesses which deal predominantly with cash or invoices might not be able to make use of these loans, and in fact too much business done in cash could breach your agreement with the lender. This means it’s well suited to retail businesses, but not necessarily to tradies.

Merchant cash advances have quite short loan terms, and need to be repaid within 12 months of the original loan. This, combined with payback amounts starting at 20%, can make merchant cash advances not suitable for large amounts. But the fact that the repayments flex with your cash flow can still make them a useful option – especially for smaller, short-term loans.

In general, the high cost and flexible repayments of a merchant cash advance make it best suited to a business with limited cash reserves, but a steady flow of electronic transactions.

Pros and cons of a merchant cash advance


Fast access to funds

Merchant cash advances are generally very quick to turn around with a simple application process, potentially getting approved and funded within a day or two.

No security / deposit required

A merchant cash advance doesn’t require security or a deposit. Technically the security is your future income – as odd an idea as that might seem.

More lenient approval criteria (less weight on credit score)

Merchant cash advances are generally no difficult to get approval for, if your business is eligible. They also place very little weight on your credit rating, so they’re generally quite suitable for a business which has had financial struggles in the past but is now recovering and doing steady trade.

Payments flex with income (No fixed repayments)

One of the most obvious advantages is the fact that the repayments flex with your cash flow. In addition to keeping repayments affordable, it also means that in a season of plenty the payments increase, and the loan automatically pays itself off faster.

Cost is set upfront

Although the payback amount can be substantial, the fact that the overall cost of a merchant cash advance remains set can be helpful – you know exactly what you’re dealing with, cost wise.


Relatively high fees compared to traditional finance

There’s no getting around the fact that a merchant cash advance isn’t cheap. A 20-40% payback amount over 12 months means they effectively have an interest rate of at least 20% p/a – which is higher than most credit cards.

Depends on electronic transactions

The dependence on electronic transactions limits the number of businesses a merchant cash advance is useful for. It can also potentially limit your business possibilities while the loan is being paid off.

Short term (12 months max) compared to other loans

A maximum loan term of 12 months puts merchant cash advances among some of the shorter loans on the market. It also means the holdback amount (that you lose out of your business cash-flow) needs to be on the high side, to repay the money in that time frame.

Dependant on continued sales

Obviously, the cash flow of your business affects your ability to make repayments, meaning your cash flow needs to be maintained a certain pace – potentially you need to be a little bit conservative when it comes to business decisions, so as not to disrupt cash flow.

Possible added restrictions

You need to be careful reading the fine print on a merchant cash advance agreement, as they can include more restrictions than an average loan – potentially limiting things like changes to operating hours, or offering cash discounts.

Frequently asked questions about merchant cash advances

What fees can I expect on a merchant cash advance?

In many cases, the holdback amount represents the full cost of a Merchant cash advance – all fees included. Some lenders however, will charge small fees such as a one-off establishment fee (payable at setup), or a monthly account keeping fee. It’s worth confirming with a lender what fees they charge.

How is the payback amount on my merchant cash advance decided?

The lender will decide the required payback amount based on various factors – most notably how much money you’re borrowing, the holdback amount being paid, and how established and stable your business is.

What happens if my sales drop off and I haven't repaid the loan within 12 months?

If the loan term concludes while you still have money owing, you will be required to pay back the outstanding amount – which could in turn require supporting finance. If you find yourself in need of a business loan to consolidate a debt like that, the Savvy website is a good place to start – allowing you to quickly comparing loans to find one suited to your business.

Is a merchant cash advance covered by the same regulations as a traditional loan?

No. Because a merchant cash advance is officially a “sale of future revenue” rather than a loan, many of the standard regulations around business loans don’t apply to them. But there are still broad government regulations that apply.

What can I use the funds from a merchant cash advance for?

There are few restrictions on what a merchant cash advance can be used for. As long as it’s being used for business purposes and you’re abiding by the terms of your agreement with the lender, it’s really your choice.

Can I automate the repayments on a merchant cash advance?

This is normally the process. Once your merchant cash advance is finalised, your lender will normally help you set up a specialised account that your cash flow is ducted through. The lender then deducts the holdback amount from each payment coming into the account, and redirects the rest back into your existing accounts. You don’t normally have to do anything – once set up, the process takes care of itself.

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