Business loan or merchant cash advance: which suits you?
A business loan has fixed repayments; a merchant cash advance is repaid from your card takings and flexes with trade but usually costs more. How each is repaid, the total cost, what providers check, how we compare the two and when neither suits.
A business loan gives you a fixed sum that you repay in set instalments over an agreed term, whatever your sales do. A merchant cash advance, also called revenue-based finance, is repaid as a share of your future card takings, so repayments flex with trade but the total usually costs more; which suits you depends on how steady your income is, what the money is for and the total you would repay.
How is each one repaid?
A business loan
You borrow a lump sum and repay it, with interest, in fixed weekly or monthly instalments over a set term, from a few months to several years. The instalment is the same in a record December and a quiet January: easy to budget for, but due even when takings dip.
A merchant cash advance
You receive a lump sum, and the provider collects an agreed percentage of your card takings, usually every day, until the advance plus a fixed fee has been repaid. There is normally no fixed end date: if trade slows, it simply takes longer to clear. Only card takings count, so cash and bank transfers do nothing to reduce the balance.
Which costs more overall?
Compare the total you will repay in pounds, not the headline figure.
- A loan is priced with interest, shown as a rate or an APR, plus any arrangement fee. A longer term means smaller instalments but more interest in total.
- An advance is priced with a fixed fee, often shown as a "factor rate": a multiplier applied to the amount advanced. Capitalise gives the example of £10,000 at a factor rate of 1.20, which means £12,000 to repay however long it takes.
Because the fee is fixed, clearing an advance quickly in a strong spell does not make it cheaper. It makes the effective annual cost higher. For a business that could get a standard term loan, an advance usually costs more overall. What you pay extra for is flexibility and, often, speed.
Ask about early settlement too: some advances give a discount for clearing early and some do not, and some loans carry an early repayment charge.
Flexibility or certainty: which matters more to you?
- Certainty favours a loan. You know the instalment and the end date from day one, which suits money for something long-lived, such as equipment, a refit or premises.
- Flexibility favours an advance. Repayments ease off when sales fall, which can help a seasonal café or salon through a quiet month, as long as card takings recover.
Flexibility works in both directions, though. In your busiest weeks a bigger slice of your takings goes to the provider.
What does each provider check?
Loan lenders usually look at affordability and credit: business bank statements, filed accounts or management figures, tax returns, existing borrowing and the credit history of the business and its directors. Our guide to what lenders look at before a business loan goes into more detail.
Advance providers lean on your card sales: how much you take by card each month, how consistent it is and how long you have traded, often read straight from your card processing data. The size of advance offered is usually linked to your average monthly card takings.
Either may ask a director for a personal guarantee, which can turn company borrowing into a personal liability. Ask before you apply, not after the offer arrives.
The rules differ too. Lending to limited companies generally sits outside the Financial Conduct Authority's consumer credit rules, and merchant cash advances are typically not FCA-regulated. That means fewer standard protections and less consistent paperwork, so read every term.
How we compare the two for a client
We do not start with the offers. We work through four questions, in this order:
- What is the money for, and when will it pay for itself? Stock for a busy season that sells within weeks points one way. A new oven that earns its keep over five years points the other.
- What does your quietest month look like? From the last 12 months of bank and card statements, we find the weakest month and check what a fixed instalment, or a share of takings, would leave for rent, wages and suppliers.
- How much of your income comes in by card? If a large part arrives as cash, transfers or invoice payments, an advance repaid from card takings may take much longer to clear than you expect.
- What is the total in pounds? We set out each option's total repayable side by side with fees, guarantees and early repayment terms.
Sometimes the honest answer is neither.
When does neither suit?
- You would be borrowing to cover losses, with no clear plan to turn them round.
- You would be taking a new advance to repay an existing one.
- Your quietest month only works on paper, with nothing left over.
What this means for your business
A loan suits a clear, longer-term use where you can carry the same payment every month. An advance suits a short-term need, repaid from steady card sales, where you accept a higher cost for flexibility. Either way, the deciding numbers are the total you repay and what is left in your quietest month.
Practical steps before you apply
- Download 12 months of business bank and card statements.
- Write down what the money is for and how it will pay for itself.
- Find your quietest month and test both types of repayment against it.
- Ask every provider for the total repayable in pounds, all fees, the early repayment terms and whether a personal guarantee is needed.
- Check whether an advance requires you to change card machine or card processor.
Frequently asked questions
Is a merchant cash advance a loan?
Not technically. It is usually set up as an advance against your future card sales rather than a loan with interest, which is one reason it often falls outside FCA rules. In practice you still owe the full amount agreed.
Can I have a business loan and a merchant cash advance at the same time?
Sometimes, but each provider will look at what you already owe, and two sets of repayments can squeeze your cash flow.
Which is quicker to arrange?
Advances are often quicker because providers can read your card data directly, but timing varies. Do not let speed decide on its own; compare the total cost.
Talk it through with us
Not sure which fits? We can compare options from our panel of lenders and providers and show the total cost of each in pounds. Start on our business finance page, or read our guide to revenue-based finance. If you take cards, a free card fee review can sit alongside it, and our card machines page explains what we look at.
Call or WhatsApp 07777 175890.
Jos Finserv Ltd (company no. 14560046) is an independent broker. For business finance we are a credit broker, not a lender, and we may receive commission from providers. Approval and terms depend on your trading history. No obligation.
Sources
Want us to look at your own numbers?
Tell us how to reach you and we will come back with what is actually available for a business like yours. We are paid by the provider, not by you, so this costs you nothing either way.
- We read your current statement and explain it in plain terms
- No obligation, and no pressure to move if you are already well placed
- One conversation, not a sequence of calls
Prefer to work it out yourself first? Use the card fee calculator, or check whether finance is worth exploring.
