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Cash Advances: A Quick Solution for Business Cash Flow

If you’re looking for quick and simple funding solutions for your business, you may have been offered a cash advance. But before you proceed with this finance option, you need to clearly understand cash advances, the options available and the advantages and potential drawbacks associated with this finance source. We have broken it down for you in our guide at Portman. 

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Understanding Cash Advances

A cash advance is a form of cash flow finance which allows a business to boost its cash flow during uncertain periods for a short time. For example, during a seasonal trading dip or to cover the cost of business-critical stock or equipment. However, it is also an excellent way for smaller businesses to grow and expand, using a cash advance to hire more staff and invest in their website and other areas. 

In more basic terms, it is a short-term loan. 

Types of cash advances available to businesses

There are a variety of cash advance types available, including:

  • Merchant cash advance: Available for SMEs, and also known as a revenue loan, a turnover loan, or revenue-based financing.
  • Credit card cash advance: A percentage of the individual’s credit limit offered by their credit card. 
  • Payday loan: Requires proof of your monthly income and can be extremely predatory. 

In this guide, we will focus on merchant cash advances, the only suitable cash flow finance option for businesses. 

How cash advances differ from traditional loans

While both cash advances and traditional business loans give you the finance you need, key differences exist between the two funding options. For example, a business loan is a much more traditional form of borrowing that provides monthly repayments, fixed terms and interest rates. 

A cash advance is arguably a more flexible alternative that provides upfront cash and takes repayment through a portion of future credit card sales. Understanding these differences is key to ensuring you get the finance options most suitable for your business. 

Benefits of Cash Advances

Utilising a cash advance or business has a variety of benefits, including:

Fast and convenient access to capital

Unlike traditional loans, which may involve lengthy approval processes and extensive documentation, a merchant cash advance typically has a simpler application and approval procedure. SMEs can receive the funds quickly, sometimes within a few days, allowing them to address immediate financial needs or take advantage of time-sensitive business opportunities.

Flexibility in fund utilisation

With a cash advance, businesses are not limited to strict usage restrictions like they sometimes can be with traditional loans. The cash advance can be used for various purposes, such as purchasing inventory, expanding marketing efforts, upgrading equipment, or managing cash flow. This flexibility allows SMEs to allocate funds where they are needed the most, enabling them to adapt and make strategic decisions based on their unique business needs.

No collateral requirements

A merchant cash advance is a financing option that does not require collateral from the borrower. Instead of relying on assets as security, it is based on the future credit card sales or revenue of a business. This makes it an attractive choice for small businesses or merchants who may not have substantial assets to offer as collateral.

Suitable for businesses with fluctuating cash flow

Cash advances are particularly well-suited for businesses with fluctuating cash flow. Since repayment is based on a percentage of future credit card sales, it allows businesses to repay more when sales are high and less when sales are low, providing flexibility in aligning repayment with their cash flow patterns. This can help businesses manage seasonal or unpredictable revenue fluctuations without straining their finances.

Ability to bridge short-term cash flow gaps

By providing quick access to funds based on future sales, cash advances can help cover immediate expenses, manage inventory, or seize growth opportunities. This allows businesses to maintain their operations and meet financial obligations during temporary liquidity challenges.

Applying for Cash Advances

If you think a merchant cash advance might be an option for your business, here is what you should know about the application process. 

Eligibility criteria for cash advances

In order to successfully apply for a merchant cash advance, you must be able to demonstrate the following eligibility criteria:

  • Information on Finances: Large volume of monthly transactions, around £5,000 of card transactions per month or £60,000 per year, and demonstratable turnover and profitability 
  • Business History: Information on trading history, debt repayment history and business plan. 

Required documentation and application process

The required documentation for a merchant cash advance is typically minimal compared to traditional loans. Generally, applicants must provide recent bank and credit card processing statements to demonstrate their business’s revenue and sales history. The application process is often streamlined, with fast approvals and funding, making it convenient for businesses in need of quick capital.

Evaluating cash advance providers

When it comes to selecting a cash advance provider, it’s essential to consider factors such as the provider’s reputation, terms and conditions, fees, and repayment structure. Comparing multiple providers and obtaining quotes can help businesses make an informed decision and select the option that best aligns with needs and financial goals.

Pros and Cons of Cash Advances

Now you know what a cash advance for business is, you need to consider both the advantages and potential drawbacks of this funding option before you proceed with an application. 

Advantages of cash advances

Merchant cash advances offer several advantages for businesses:

  • Provide quick access to capital without requiring collateral, making them accessible for small businesses. 
  • Suitable for businesses with fluctuating cash flow, as repayment is based on a percentage of future credit card sales.
  • Bridge short-term cash flow gaps and offer flexible repayment options, allowing businesses to manage their finances effectively.

Potential drawbacks and considerations

While cash advances have advantages, they also have potential drawbacks you should consider:

  • Higher costs compared to traditional loans, which often have higher interest rates or fees
  • Fixed repayment structure can be an issue if sales are lower than expected, as the fixed percentage deduction may impact cash flow
  • Potential to spark a cycle of dependency on cash advances

Tips for a Successful Cash Advance Application

If you have decided that a cash advance is a suitable option for your business, it is time to put together your application. To ensure your cash advance application is successful, here are a few tips to consider.

Evaluate cash flow needs and repayment capacity

By thoroughly assessing your cash flow needs, you can determine the exact amount of funding required and avoid borrowing more than necessary. This helps in managing the repayment process effectively and minimising the risk of overextending your finances.

Maintain a record of consistent sales and cash flow

A record of consistent sales and cash flow demonstrates that your business has a reliable customer base, a consistent revenue stream, and a healthy financial performance. Lenders often evaluate this historical data to assess the risk associated with the cash advance. It showcases your business’s ability to generate sufficient funds to meet the repayment obligations.

Review terms and fees carefully

Carefully review the terms, fees, and repayment structure outlined in the agreement. Ensure you understand the factor rate, holdback percentage, repayment period, and any additional fees. Clarify any uncertainties before signing the agreement to avoid surprises later.

Seek reputable and reliable cash advance providers

Not all cash advance providers offer the same terms and conditions. Take the time to research and compare different providers, considering factors such as interest rates, fees, repayment options, and customer reviews. Portman works with a number of cash advance providers and so can help compare the market for you, allowing you to select a reputable provider that aligns with your specific needs.

Have a plan for efficient fund utilisation

Outline how you intend to use the cash advance funds to benefit your business. Demonstrating a well-thought-out plan that aligns with growth, inventory management, or addressing cash flow gaps can increase the lender’s confidence in approving your application.

Alternatives to Cash Advances

Although cash advances for businesses are a great way of accessing funding fast for many SMEs, there are some alternative means of financing that you could consider. 

Business lines of credit

A business line of credit is a flexible financing option that provides a predetermined credit limit that you can draw from as needed. It allows you to access funds whenever required and repay them with interest. This option provides greater control over your borrowing and can be suitable for ongoing working capital needs or unexpected expenses.

Small business loans

Small business loans are traditional loans offered by banks, credit unions, or online lenders. These loans provide a lump sum of money that is repaid over a fixed term with interest. Small business loans are often used for larger investments, such as equipment purchases, expansion, or inventory restocking. They typically require collateral and a more thorough application process. We can help you secure a small business loan at Portman. 

Trade credit and supplier financing

Trade credit refers to agreements with suppliers allowing businesses to purchase goods or services on credit and pay at a later date, such as asset finance. This can help manage short-term cash flow needs by extending payment terms. Supplier financing is a similar concept where the supplier offers financing options specifically for their products or services, such as deferred payments or instalment plans.

Crowdfunding and peer-to-peer lending

Crowdfunding platforms and peer-to-peer lending platforms provide alternative funding sources by connecting businesses with individual investors or contributors. Businesses can pitch their ideas or projects to attract funding from a larger pool of people.

Government grants and programs

Government grants and programs, such as recovery loans, supply funds for any business use with capped and fixed interest rates. They have been put in place in the aftermath of the global pandemic to help businesses recover from the effects of lockdown. 

Cash Advance FAQs

For more information on cash advances, fund the answers to your queries in our most frequently asked questions. Alternatively, don’t hesitate to get in touch with us at Portman for more specialist advice. 

How quickly can I expect to receive funds from a cash advance?

The timeframe for receiving funds from a cash advance can vary depending on the cash advance provider and their specific processes. However, one of the advantages of a cash advance is its relatively quick funding process compared to traditional loans.

Are there any restrictions on how I can use the funds from a cash advance?

No, there are no restrictions on how you can use funds from a cash advance. They are intended to smooth cash flow fluctuations and keep your business stable through a cash pitfall. 

How is the repayment of a cash advance structured?

Typically, you will repay a cash advance through card payments made by your customers. 

Can I apply for a cash advance if my credit score is low?

Yes, you can still apply for a cash advance even if your credit score is low. One of the advantages of cash advances is that they are often accessible to businesses with less-than-perfect credit. Cash advance providers typically focus more on your business’s revenue and sales history rather than your personal credit score.

Are there any risks associated with cash advances?

Yes, there are some potential risks associated with cash advances that you should consider before applying. For example, taking multiple cash advances consecutively without addressing underlying financial issues can lead to a cycle of dependency and accumulating debt.

Conclusion

Overall, cash advances can be a valuable tool to bridge temporary cash flow gaps and support business growth. By understanding the intricacies of cash advances and making informed decisions, businesses can utilise this financing option effectively and strategically to meet their short-term financial needs. For more advice on funding options for your business, speak to one of our finance experts at Portman. 

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