Business Financing in the UK

Businesses in the UK face a growing number of challenges, but accessing fast working capital need not be one of them. Small businesses of all types can quickly and easily apply for and receive cash advances – an alternative form of financing that is rapidly growing in popularity. But what exactly is a cash advance, and how do they work? What’s so special about them that Swiftfund has chosen to specialise in them? Let’s take a look at everything you need to know.

What is a cash advance?

A cash advance – also known as a business cash advance, a merchant cash advance, or MCA – is a form of short term, unsecured borrowing for businesses. Technically, a cash advance is not a loan; rather it is an advance on future sales proceeds, which must be paid back via those future sales. This is ideal for businesses in a variety of industries, as 69% of small and medium companies in the UK apply for financing for cash flow reasons alone.

How does a cash advance work?

The main feature of a cash advance that differentiates it from other types of borrowing is its repayment schedule and method. With a traditional loan, a business receives a lump sum and then repays that sum via pre-set, regular repayments over a defined period of time, until the debt is cleared.

However with a cash advance, repayment happens with every debit and credit card sale. Each card sale has a fixed percentage deducted from it, directly through the point-of-sale (PoS) system, and this is used to repay the lender. These deductions happen until the entire borrowed sum has been paid back. The greater your volume of sales, the more quickly the debt will be cleared.

Cash advances are therefore flexible and match your incoming cash flow, making repayment easier for businesses reliant on sales. There is not a set rate of interest, so it does not cost you more if it takes you longer to pay the funds back. And you do not have to calculate or manage repayments yourself – this is all done via the PoS system.

Key terminology for cash advances

Advance amount

This is the amount of money a lender is willing to lend you – usually based on your expected revenue from future sales.

Holdback

The holdback is the amount held back from each debit or credit card transaction in order to repay the advance. This is calculated as a percentage. Holdbacks will automatically happen until the advance is paid back in full.

The holdback percentage depends on how much your advance was, how long you have to repay the advance, and your level of receivables. Typical holdback rates range from 10%-20%. 

Repayment amount

The repayment amount is the total amount you need to repay the lender. This is effectively the sum of all of the holdback amounts over the life of the agreement.

Factor Rate

Cash advances do not have interest rates; instead they have a fixed fee. This fee is expressed as a factor rate. Here’s an example: if a business agrees to pay a fee of £0.20 for every £1.00 borrowed, this equals a factor rate of 1.2.

How much can be borrowed with a cash advance?

Cash advances are available from as little as £5,000 to as much as £500,000. The exact amount that can be borrowed will depend on business specifics, such as expected cash flow. The average amount borrowed by SMEs in the UK is £14,000.

What can a cash advance be used for?

One of the major benefits of a cash advance is that there are no restrictions on what the funds can be used for. Costs frequently covered by cash advance financing include:

• Inventory costs
• Employee pay
• Bill payments
• Equipment purchase or repair
• Rent
• Premises repair or renovation
• Marketing costs
• Expansion costs
• Day-to-day cash flow
• Paying VAT

How long do cash advance agreements last?

As mentioned above, cash advances differ from traditional loans in that they don’t have a set, unchanging repayment period; instead they have a maximum amount of time over which the advance must be repaid. This is usually capped at 18 months. The more you receive in sales revenue, the quicker you will pay off the debt. The average time it takes to repay a cash advance is about six months. It’s important to note though that cash advances are not designed for long term borrowing. Their relative cost and accessibility is much better suited to short term needs.

How much does a cash advance cost?

It can be tricky to compare the cost of a cash advance with that of other types of financing, because cash advances do not have a set interest rate or APR. Instead they have a factor rate.

With an interest-bearing loan, interest compounds. This means that the longer you take to repay the loan, the more you’ll pay in interest. But the factor rate on a cash advance is calculated at the start of the financing agreement; it does not change according to how long it takes to repay the funds. This means cash advances have set costs, independent of borrowing time. So you can’t compare them directly to standard loans.

Factor rates on cash advances in the UK range from 1.1 to 1.5; this means that for every £1 borrowed, the borrower may pay anywhere from £0.10 to £0.50 as an effective fee. There are no other fees though – another difference from standard loans, which can have multiple fees, making them more expensive than they might initially appear.

The factor rate any given business is charged depends on the size of the business, its stability and history, the volume and value of its transactions, and other variables that may affect the lender’s perception of lending risk.

What types of businesses can get a cash advance?

Almost any type of UK business can get a cash advance, which is good news given that 43% of SMEs in the UK intend to apply for external financing over the next 12 months. The only crucial criteria is that you will be paid for goods and/or services via card transactions over the near term. This makes them especially well-suited to restaurants, shops, bars, cafes, salons and other transaction-heavy retail and hospitality sectors.

While most point-of-sale systems are compatible with cash advance repayment mechanisms, not all are, so you should check yours before borrowing. Currently, all of the following are compatible with cash advances:

• Adyen
• AIB (Allied Irish Banks)
• Amazon Pay
• Barclaycard
• Dojo
• Elavon
• EVO Payments
• First Data (Fiserv)
• Global Payments
• iZettle
• Judopay
• Klarna
• LLoyds Cardnet
• Payment Sense
• Payoneer
• Paypal
• SagePay
• Shopify Payments
• Square
• Stripe
• SumUp
• Takepayments
• Tyl by NatWest
• Valitor
• Worldpay

If you run a cash-only business, a cash advance won’t suit; if you run an ecommerce business you should be fine as long as you use a standard online payment gateway, such as Stripe.

Where can I get a cash advance from?

There are a multitude of cash advance providers in the UK, many of whom are digital. Choosing the right cash advance provider for your business is quite important, as different lenders have different costs, lending limits, and eligibility criteria. They will also have differing levels of service, past customer reviews and transparency. 

To make sure your cash advance journey goes smoothly, start by finding lenders that can offer you the financing you need: whose lending requirements you meet and who can match your loan amount and needed turnaround time. Then look at each option’s terms – not just the factor rates they offer, but also their terms and conditions. 

We encourage businesses to do their research; we’re confident that the cash advances we offer at Swiftfund are competitive and that our long history of satisfied customers speaks for itself.

A reputable cash advance lender will be completely transparent about their costs and terms, as we are.

How do I apply for a cash advance?

Applying for a cash advance is much faster and simpler than applying for a business loan. After all, they’re designed for accessibility and convenience. Most cash advance lenders have online platforms through which you can apply, and Swiftfund is no exception; you can access a cash advance with us in just a few steps, here.

You’ll need some basic business information to hand to complete your application; this usually consists of:

• I.D.
• Business legal documents (e.g. company registration)
• Business bank account details
• Several months of debit/credit card receipts for the business
• Several months of bank statements and/or financial records (e.g. cash flow, tax returns, balance sheet)

Different lenders may have slightly different paperwork requirements, so be prepared.

How quickly can I get a cash advance for my business?

Another big advantage of cash advances is their speed. Whilst it may take a bank several weeks to process a business loan application, cash advance lenders can process your application in one to two days. This means businesses can access cash fast, as and when they need it.

Does my credit score affect my cash advance?

Another advantage of cash advances is that they do not rely on a good credit score. Some cash advance lenders may perform a credit check as part of their application assessment, but this is by no means a given, and lending decisions are based much more heavily on expected revenue than on credit. This means new businesses without a credit rating, or businesses or individuals with bad credit, can still access this type of funding. And as the advance is unsecured, businesses without assets can access them too.

While your credit score probably won’t affect your ability to get a cash advance, getting a cash advance may impact your credit score. Failure to repay any debt, including a cash advance, can harm your credit, so only ever borrow what you can afford to repay.

Pros and cons of cash advances

Pros:

• Provide quick access to cash
• Easier qualification criteria compared to business loans
• No collateral required
• Repayments match your incoming revenues
• Repayments taken at point of sale, so no messy calculations or repayments to manage
• No hidden fees
• Cost of funding is set at the start of the agreement, and cannot change
• Scalable with business needs and size
• Credit history not a factor

Cons:

• Not suitable for cash-only or non-sales based businesses
• More expensive than long term or secured forms of borrowing
• Negative impact on cash flow may strain operations
• Some point-of-sale systems may not be compatible
• Borrowing amounts smaller than with secured or long term loans
• Repaying the advance early does not save on costs

Alternatives to cash advances

Whilst cash advances can provide flexible, convenient access to funds for a range of needs, they are not right for every business and every situation. There are alternative forms of business financing that might better suit. These include:

Small Business Loans

Some businesses are eligible for a traditional business loan from a bank or other financial institution. These loans have a few benefits: borrowing amounts can be high, repayment periods can be long, and the cost of borrowing may be lower than with other forms of borrowing. However, the qualification criteria for business loans are quite strict, and rely on an established business history, a good credit score, and potentially assets to secure the loan against. They also take longer to apply for and to get. So they’re a good long term solution for large funding needs, but less helpful in the short term.

Business Credit Cards

A business credit card can provide quite a lot of flexibility for businesses looking to have ad hoc access to varying amounts of cash. These cards usually have much higher borrowing limits than personal credit cards, and can come with perks tailored to business needs. But the interest charged on credit card balances is usually high; this means that while they’re useful for very short term purchases, they’re extremely expensive for any long term needs.

Business Lines of Credit

A business line of credit is sort of like a credit card, in that there will be a pre-set limit up to which the business can borrow funds as and when it needs them. Interest is only charged on what’s actually borrowed, and once repaid the credit can be reused again and again. This makes business lines of credit flexible and convenient, but not every business is eligible for one. As with larger and longer term loans, most lenders will want to see a history of profitability from the business, as well as a good credit score, before they approve you.

Quick-fire cash advance Q&A

How can I lower the cost of my cash advance?

Shopping around between cash advance providers is one way to make sure you’re getting the best deal. Another point to note is that if you have a positive repayment history for past cash advances, this can help you qualify for a better factor rate in the future. Many businesses use the same provider again and again for their cash advance for just this reason.

Are cash advances regulated in the UK?

Not currently, however, cash advance providers who offer other forms of funding may be regulated by the Financial Conduct Authority for those other products. If you’re at all worried, check the regulation status of a financial product, and the lender’s past reviews, to gauge reputability.

Can my business get a cash advance if it has been rejected for other types of financing?

Yes. Being rejected for past financing does not impact your ability to get a cash advance for your business.

Are there fixed repayment options on a cash advance?

No. Repayments on a cash advance happen on a transaction-by-transaction basis, via debit and credit card sales.

Do I have to calculate my cash advance repayments?

No. Your cash advance repayments are automatically calculated and deducted from each debit or credit card sale, without you having to do anything.

Can I repay a cash advance early?

Yes, and there are no penalties for early repayment. However, there are no benefits to early repayment either, as the total cost of the funding is set at the start of the agreement.

What are the eligibility criteria for cash advances?

Cash advance providers will work with sole traders, partnerships and limited companies all across Britain, in a range of industries. The exact eligibility criteria vary by provider, but most will want to see a trading history of at least three months, and a minimum of ten card transactions per month. Some also have a minimum turnover threshold, usually set at £2,500 per month.

How much can I get with a business cash advance?

That depends on your business and the provider you choose. Most cash advance providers will offer an advance of between one and two times monthly card turnover.

Do I need a business bank account to get a cash advance?

Yes; this is so you can receive the cash advance, and facilitate repayments.

What happens if I don’t repay my cash advance?

Defaulting on any financing can have serious consequences for your business. A cash advance provider has the right to pursue action against you if you fail to pay back the advance according to the advance agreement. This action may take the form of legal proceedings, debt collection, or a lien on – or seizure of – business assets.

Are there cheaper alternatives to cash advances?

Yes, but they have differing qualification criteria so not every business will be able to get them. Generally speaking, any secured form of borrowing will be cheaper than unsecured borrowing, as the presence of collateral lowers the lender’s perceived risk. Cash advances are unsecured, making them useful for those without assets or requiring the flexibility and convenience they offer. But for those seeking large borrowing amounts for longer periods of time, standard loans or lines of credit may be cheaper.

How do I find a reputable cash advance provider?

When looking for a cash advance provider, you need to consider the following:

• Transparency
• Price
• Speed of services
• Reputation
• Terms and conditions
• Customer support

A good cash advance provider will work with you to support your business needs throughout the term of your agreement, not just when trying to sell to you. For more information on how Swiftfund does this, read all about our policies and how our experts can help you, here.