While the UK government is continuing to talk a good game when it comes to “levelling up”, this positive rhetoric is yet to translate into tangible returns for the small business community and regions in the north.

For example, the recently republished “Scale Up to Level Up” report published by the APPG for Fair Business Banking found that there was a £22 billion funding gap for small businesses in the UK. This needs to be closed for levelling up to become a reality, especially in a post-coronavirus climate where funding may be hard to come by.

Fortunately for firms, there are some lending options that remain viable in the UK. One of these is a merchant or business cash advance, but what does this refer to and what are its pros and cons?

What is a Business Cash Advance?

While a merchant or ‘business’ cash advance is different from a traditional bank loan, primarily because it boasts a different structure.

With a traditional bank loan, monthly repayments are strict and stay the same at all times, which means that the loan may become affordable during quieter or challenging times. 

However, the terms of a cash advance are transparent from the beginning, while you’ll have the flexibility to pay back the capital much quicker depending on the performance of your business.

Similarly, merchant cash advances are based on the content of your business and credit card receipts, which form part of a comprehensive assessment that reviews precisely how much money you need and a viable repayment amount.

This is one of the benefits associated with merchant cash loans, as the contract you sign with the MCA lender, you’ll have access to an immediate outline of the precise amount you’re receiving and the rate of interest that you’ll have to pay.

You’ll probably notice that interest rates can vary wildly at this stage, with the status of your venture and its ability to demonstrate consistent earnings key as lenders look to evaluate and manage their risk.

On a final note, the application process for an MCA is not as rigorous as the one associated with a traditional loan. However, there will be a detailed contract with stipulations that you’ll need to be aware of when applying for a merchant cash advance, and reviewing these is crucial to getting the best possible deal.

What are the Pros and Cons of an MCA?

But what are the main benefits of a merchant or business cash advance? Well, it’s certainly quicker to apply and be accepted for an MCA, while companies with a poor credit score won’t have to worry about this undermining their application.

An MCA is also unsecured in nature, so you won’t need to risk collateral to secure the loan. At the same time, you’ll have access to more flexible payment plans, while there’s no additional cost if you want to settle your debt early.

There’s not a great deal to discuss in terms of negatives, although the lack of collateral and rapid application process often translates into higher rates of interest (as lenders look to offset their increased risk).

Interest rates for MCAs can vary at the best of times, and there’s no doubt that this may increase the cost of repaying your merchant cash advance at the expense of your bottom-line profits.