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What is a merchant cash advance?
A merchant cash advance is a form of business cash advance. It is essentially an advanced payment, against your company’s future income — using future POS sales to secure the lending, rather than your personal or business assets.
Merchant cash advance — considerations
Whether investing in new equipment or covering other costs — companies need cash for their daily operations. SMEs often have trouble securing more traditional — secured or unsecured loans. Accordingly, being aware of alternative financing solutions is important.
A merchant cash advance, is a new type of lending in Nigeria — that companies making sales through digital channels, shouldn’t ignore. The amount that can be loaned out to you, is based on your business’s average monthly turnover. The monthly repayments are also adjusted, based on your actual monthly takings — the more you make in a given month, the more you pay back.
Merchant cash advances place less importance on things like credit history — allowing you to get financing with no or poor credit history. This less reliance on credit history, also means the underwriting process is relatively simple — with high rates of approval.
How does merchant cash advance work?
Businesses seeking a merchant cash advance, will contact a lender offering such financial product. You would need to give the financing company, access to your card transaction data. This data will allow lenders to see the money flowing through your business, in real time, as well as your sales history.
Based on this card data, a lender will be able to offer you an advanced single lump sum — to be paid back in proportion to your future card earnings. Repayments work by automatically debiting a small percentage of your card sales — via your POS machine or card terminal.
There are no fixed repayment terms/deadlines. This flexibility means you avoid paying late payment fees and penalties.
Benefits of merchant cash advances
- Easy to access
- Tailored to suit company cash flow
- Does not require collateral
- Credit history is less important
- Little to no paperwork required
- Great finance solution for SMEs in the retail sector
Limitations of merchant cash advances
- Can be more expensive than traditional forms of lending
- You need to be taking card payments
- Not suitable for startups (with no sales history)
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