Cash Advances & Invoices
Cash Advances & Invoices
Cash Advances provide unsecured funding that is repaid by deducting a fixed percentage from the borrower’s income each day. They are often used by businesses that receive much of their revenue via card payments, the fixed daily percentage being deducted automatically by the merchant services provider and passed to the lender.
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The Informed Funding two-minute guide: Business Cash Advances
- What is a Business Cash Advance?
A business cash advance is a source of unsecured funding for businesses that accept payments from their customers via cards. However unlike a conventional loan that has fixed repayments on specific dates, the repayments for a business cash advance are made by deducting a fixed percentage of your card sales each day. This means that the repayments are always linked to your revenues, increasing and decreasing in line with your daily income from card payments.
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- What are the advantages of this type of loan?
The three main attractions of business cash advances are that they are flexible, come at a fixed cost and do not require you to provide any security. First, because repayments are linked to your card revenues, you will repay more when your business’s income is high and less if it falls, which helps to minimise the pressure on your cash flow. This also means that there is no fixed date by which the advance must be cleared: the rate at which you pay it off will depend entirely on how your revenues perform. Second, the cost of the advance is fixed at the start and this does not increase if you take longer than expected to repay. Third, business cash advances are unsecured so you are not required to put business or personal assets at risk. This type of lending may be attractive to businesses that can’t obtain loans because they have bad credit ratings or little collateral available. However this type of lending will typically be significantly more expensive than a loan due to its unsecured and flexible nature.
- What sorts of business can apply?
Business cash advances are available to limited companies, partnerships and sole traders that take payments via a credit or debit card terminal. Repayments are recovered directly from the business’s card takings by the merchant services company that provides the terminal, with the percentage owing to the finance provider automatically deducted before you receive the balance of the money. While available to any business that accepts cards, this type of finance is particularly popular with pubs, restaurants, hotels and retailers. Any cash or cheque revenues are excluded from the agreement.
- How much can businesses raise?
You can usually borrow the equivalent of one month’s typical card takings, which in practice can range from a few thousand pounds up to several hundred thousand. This is normally repaid over a period of between six and nine months, although you can agree to repay more rapidly if your business’s pattern of income makes that feasible.
- What does it cost?
The total cost of borrowing via a business cash advance is not usually expressed as an annual percentage rate. Instead, providers tend to quote a price to advance a certain sum of money which usually comes out at about £3000 for every £10,000 you receive. Therefore, if you obtain an advance of £10,000 you will ultimately pay back about £13,000 regardless of how long it takes you to do so.
- How long does it take to arrange?
Because this form of finance unsecured, it can be arranged relatively quickly – usually within a day or two. You will have to provide evidence of your revenues from card payments over several months so that the finance house can work out how much funding you will be able to obtain.
- Need to know:
- Because a business cash advance will be repaid as a set percentage of your daily income from card payments, the repayments will reduce your profit margin on every sale. It is therefore important to know what your margins are so that you can be sure the repayments won’t cause you any problems.
- This is a fixed-price loan and you cannot therefore reduce the total you owe by repaying it early.
- This type of funding will typically appear as a current liability in the accounts.
- Technically this type of funding is classified by the lender as a “purchase and sale of future income” rather than a loan. This means that cash advances are not bound by laws that regulate lenders and limit interest rates.
- This type of funding should generally not be used as a long term funding solution due to the high finance costs involved but may provide a short term or flexible solution if a business is unable to secure a bank overdraft or loan finance.
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