Alternatives to a merchant cash advance

Before comparing products it helps to be precise about what you are solving, because the right answer is usually determined by the problem rather than by the rate. Four questions do most of the work.

• Is this need one off or recurring? A single purchase points to a term facility. A recurring gap points to something revolving, because repeatedly buying fixed cost funding is how businesses end up on a treadmill.
• What is the money buying? A specific asset points to asset finance. Stock that turns quickly can carry a higher cost. Overheads cannot carry much cost at all, because nothing is generated against them.
• How predictable is your revenue? Steady revenue can support fixed repayments, and fixed repayments are cheaper. Genuinely volatile revenue makes a variable repayment worth paying for.
• How much time do you actually have? Be honest here. Most deadlines are softer than they feel, and the cost gap between funding available in two days and funding available in two weeks is often substantial.

Add one practical point: apply for the cheapest realistic option first. A declined application does not usually prevent an advance later, and finding out that the cheaper route was open costs you a few days.

A conventional term loan advances a lump sum repaid in fixed monthly instalments over an agreed period, with interest charged on the balance outstanding. Unsecured facilities from banks and alternative lenders typically run from around 1,000 pounds to 500,000 pounds over one to five years; secured lending goes considerably further. Because interest accrues on a declining balance, repaying early genuinely reduces what you pay, which is the reverse of how a factor rate behaves.

What it costs. Rates vary enormously with security, term, lender and credit profile, but a business loan is quoted as an APR and is almost always the cheaper money. On 20,000 pounds over twelve months, a loan at 12.9% APR costs roughly 1,350 pounds against roughly 5,000 pounds for an advance at a factor rate of 1.25.

What it takes. Filed accounts, management information, an affordability assessment and often a personal guarantee or security. Decisions take days to several weeks. Government backed guarantee schemes administered through accredited lenders come and go, so it is worth checking what is currently available before assuming a decline is final.

Who it suits. Businesses with predictable revenue funding something long lived, where the repayment period can be matched to the useful life of what is being bought, and where there is time to apply properly. We compare the two structures in detail on our page on a merchant cash advance versus a business loan.

A revolving credit facility is an agreed limit you can draw from, repay and draw again, with interest charged only on the balance actually drawn, usually calculated daily. It behaves like an overdraft but sits outside your bank account, which means you can hold one alongside your existing banking arrangements. Facilities commonly run from around 5,000 pounds to 250,000 pounds, and many have no fixed end date provided the facility is reviewed and kept in good order.

What it costs. Interest on drawn funds, often quoted as a monthly rate, sometimes with a facility or non utilisation fee. The crucial feature is that an unused limit costs little or nothing, so the price tracks your actual usage rather than the size of the facility.

What it takes. Generally a year or more of trading, reasonable financial records and an acceptable credit profile. Alternative lenders are often quicker and more flexible than banks, with decisions in a few days.

Who it suits. This is the option we would most often put in front of a business considering a second merchant cash advance. If the underlying need is recurring, paying only for what you draw is fundamentally better value than repeatedly buying a fixed cost advance, and the flexibility to repay when trade is strong is worth a great deal.

Invoice finance advances a percentage of invoices you have already raised, typically 70% to 90% of face value, usually within a day or two of issue. When your customer pays, you receive the balance less the provider's charges. Under invoice factoring the provider also runs collections, so your customers see the arrangement; under invoice discounting you keep control and the facility is often confidential.

What it costs. Two components: a service fee, typically a small percentage of invoiced turnover, and a discount charge that works like interest on the funds drawn. Unlike a factor rate, the discount charge accrues with time, so an invoice settled in thirty days costs less than the same invoice settled in ninety.

What it takes. A ledger of business to business invoices to creditworthy customers, and for discounting, a larger turnover with credible financial controls. Facilities are usually secured over your book debts, often with a debenture, which can restrict other borrowing.

Who it suits. Any business whose cash flow problem is the gap between delivering work and being paid for it. It is generally cheaper than an advance because the provider is funding a debt that already exists. If you have a substantial sales ledger and are looking at a merchant cash advance, look here first. We set the two out side by side on our page comparing a merchant cash advance with invoice finance.

The oldest and simplest working capital tool: an agreed limit on your business current account that you can go into and come out of as trade dictates, with interest charged on the balance overdrawn.

What it costs. Interest on the amount overdrawn, usually a margin over a reference rate, plus an arrangement or renewal fee. Unauthorised overdraft charges are considerably higher, and going beyond the limit is expensive.

What it takes. A relationship with your bank, a trading history and an acceptable credit profile. Overdrafts have become harder to obtain over the past decade, particularly for smaller and newer businesses, and many banks now steer customers towards a term loan or a card facility instead.

Who it suits. Short, shallow, frequent gaps, particularly where the timing is unpredictable and the amounts are modest. The important caveat is that an overdraft is generally repayable on demand, so it is not something to rely on structurally. If you are permanently overdrawn, the overdraft is not the right facility for the need it is covering.

Asset finance funds a specific item, most often equipment, vehicles or machinery, with the asset itself providing the security. Under hire purchase you pay instalments and own the asset at the end. Under a finance lease you rent it for most of its useful life. Refinancing raises cash against equipment you already own.

What it costs. Rates are usually well below unsecured funding, because the lender can recover the asset. Terms typically run from two to seven years and are matched to the working life of the item, so the repayments sit against the productivity the asset generates.

What it takes. An identifiable asset with resale value, a deposit in many cases, and a reasonable credit profile. Decisions are often quick because the underwriting focuses on the asset.

Who it suits. Anyone using a merchant cash advance to buy equipment. If a restaurant needs a new kitchen line or a salon needs new chairs and treatment equipment, asset finance is almost certainly cheaper and better matched than an advance, and it preserves your cash for the things that cannot be financed this way.

Revenue based finance is the closest relative of a merchant cash advance and works on the same principle, with one important difference: repayment is taken as a percentage of total revenue rather than card takings alone. That usually means a connection to your accounting software, payment platforms or bank feed rather than a split at the card terminal.

What it costs. Typically a flat fee or factor style multiplier applied to the advance, so like a merchant cash advance the total cost is fixed at the outset and does not fall if you repay quickly. Pricing is broadly comparable, sometimes a little keener where the funder has richer data.

What it takes. Demonstrable, reasonably consistent revenue through channels the funder can monitor. Ecommerce businesses, subscription companies and marketplace sellers fit naturally, since the revenue data is already digital and verifiable.

Who it suits. Businesses whose income does not arrive through a card terminal, or arrives through several channels at once. An online retailer taking payments through a mix of platforms is often better served here than by a product designed around a card machine. We go into the mechanics on our guides to revenue based finance and how revenue based financing works.

• Business credit card. For smaller sums, a card with an interest free period on purchases can be effectively free money if you clear the balance in full each month. Carry a balance and it becomes expensive, though usually still cheaper than an advance. Useful for stock and supplies rather than for large one off costs.
• Supplier credit. The cheapest funding available is often extended terms from your own suppliers, and it is astonishing how rarely it is asked for. A supplier who values the relationship may prefer sixty day terms to losing the order.
• Trade finance. Where the money is funding goods you have already sold or have firm orders for, trade and purchase order finance can fund the purchase directly, often on better terms than general working capital because the transaction is self liquidating.
• Grants and local funding. Slow and competitive, but genuinely free where available. Local authority and growth hub schemes vary by region and change frequently, so check what is currently open rather than assuming there is nothing.

Reading the table by product is less useful than reading it by problem, so here is the same information the other way round.

• You need equipment. Asset finance, almost every time.
• You are waiting on invoices. Invoice finance.
• The gap keeps recurring. A revolving credit facility, not a second advance.
• You are buying stock before a busy quarter. A short term loan or trade finance if there is time; a merchant cash advance if there is not and the margin supports it.
• Revenue is online rather than through a terminal. Revenue based finance.
• You are covering a VAT bill or wages. This is the hardest case, because nothing is generated against the cost. An overdraft or revolving facility is the least bad answer, and a conversation with HMRC about a time to pay arrangement is worth having before taking expensive funding.
• You need the money in 48 hours. Realistically a merchant cash advance, revenue based finance, or an existing facility you have already arranged. Which is a good argument for arranging one before you need it.

One thing almost all of these options have in common is that they are commercial rather than consumer products, so the protections you might expect as an individual borrower generally do not apply. Lending and funding provided to a limited company for business purposes sits outside the Financial Conduct Authority's consumer credit perimeter, which means no requirement to quote a standardised APR on some products, no prescribed pre contract disclosure, no cooling off period and no route to the Financial Ombudsman Service.

A merchant cash advance sits slightly further outside again, because it is a purchase of future receivables rather than credit at all. Sole traders and some small partnerships can fall within the Consumer Credit Act depending on the size and purpose of the agreement, and where they do, additional protections and disclosure obligations apply. It is worth establishing which side of that line your business sits on before you sign anything, because it changes what you are entitled to be told.

The practical implication for comparing alternatives is simple. Nobody is obliged to present these products on a common basis, so build the comparison yourself: total cost in pounds over a realistic period, every fee, and what happens if trade goes against you.

Having spent this page on the alternatives, it would be dishonest to imply that there is always a better option. There are situations where an advance genuinely wins.

The first is speed that actually matters. Where a supplier discount, an equipment failure or a seasonal window means the funding either arrives this week or the opportunity is gone, an advance decided against card data in 48 hours beats a cheaper facility that arrives in three weeks. The comparison is not between two rates; it is between funding and no funding.

The second is genuine volatility. A business whose takings swing by half between seasons carries real risk in a fixed repayment, and a product whose remittance falls with trade is worth paying for. That premium is not irrational, and comparing purely on annualised cost will tell you it is.

The third is access. If bank funding has been declined and there is no invoice ledger and no asset to finance, the honest comparison is between an advance and doing nothing. Sometimes doing nothing is correct. Often it is not.

What we would not accept as a reason is that the advance was the first offer that arrived, or that the factor rate looked like a small number. If you are going to pay a high cost of capital, pay it deliberately, having priced the alternatives. Our page on merchant cash advance rates sets out how to convert a factor rate into something comparable, and the provider comparison covers what to look for if you decide an advance is the right call. Where speed is the deciding factor, our guide to instant and same day business funding covers what is realistically achievable and what is marketing.