Revenue based finance vs merchant cash advance: what actually differs

Merchant cash advance is the older, narrower product. It emerged from the card payments industry, it is sold most often through acquirers and payment providers, and it works because card settlement gives a funder a reliable place to collect from without asking the business to do anything.

Revenue based finance is the wider category that grew up around online businesses, where income does not necessarily pass through a card terminal at all. It applies the same logic to a bigger definition of revenue, and it needs a measurement and collection process because there is no single settlement pipe to tap.

Everything in the table below follows from that one difference. If you want the full picture of the wider category first, our guide to revenue based funding sets it out in detail.

A merchant cash advance is the purchase of a fixed amount of your future card sales at a discount. The provider advances a lump sum, sized against average monthly card takings, and recovers it by taking an agreed percentage, the holdback, from card payments as they settle.

Because the holdback is applied at the acquirer, collection is automatic and invisible. You are never asked to make a payment, and there is no direct debit to fail. A quiet week reduces the amount collected without any action on your part, and a busy week increases it.

The consequence is that the product only works where card revenue is the dominant channel. A restaurant, salon, pub or independent shop takes almost everything through the PDQ machine, so a holdback of 10 or 15 per cent captures a meaningful share of trading. A wholesaler invoicing on thirty day terms takes almost nothing through a card terminal, so the same holdback would collect close to nothing and the product simply does not fit. Our page on merchant cash advance rates covers what these facilities actually cost.

Revenue based finance widens the definition of revenue and changes the collection method to match. Rather than tapping a settlement stream, the provider connects to the systems that record income, which might be a payment gateway, an ecommerce platform, an accounting package, a bank feed, or several of them together, and calculates the agreed percentage against the resulting revenue figure.

Collection is then made by direct debit, typically monthly, with a reconciliation step that corrects any difference between the estimate and the actual revenue for the period. That extra step is the price of the wider coverage: the product can see all your income, but it has to measure it rather than intercept it.

This is the version used by ecommerce brands, subscription businesses and companies whose revenue arrives by bank transfer, and it is where the newer UK providers concentrate. It also tends to support larger advances, because the revenue base being underwritten is bigger than card takings alone.

The row we would draw attention to is reconciliation. A holdback needs none, which removes an entire category of dispute. A revenue share needs it, and how well a provider handles it is a fair proxy for how the relationship will feel over twelve months.

Providers have commercial reasons to prefer one label over the other, and that has muddied the terminology considerably. Revenue based finance is the newer and more attractive term, so merchant cash advance products are increasingly marketed under it. Meanwhile some genuine revenue share facilities are described as cash advances because the phrase is better understood by small businesses.

We would ignore the name entirely and look at three things in the agreement. Which income streams are counted when the percentage is applied. Where the money is collected from, an acquirer or a bank account. And whether a reconciliation process exists, since its presence tells you the provider is measuring rather than intercepting.

Those three answers tell you what you are actually buying, regardless of what the website calls it. The mechanics behind both are the same, and we set them out in how revenue based financing works.

Work out roughly what proportion of your monthly income arrives as card payments, and the answer usually follows.

• Mostly card revenue. A merchant cash advance will generally be the better priced and simpler option. The market is more competitive, collection is automatic, and providers integrating directly with your acquirer can underwrite from data they already hold.
• Mixed card, bank transfer and online revenue. A broader revenue share sees more of your business, which usually means a larger advance and a lower percentage taken from any one channel.
• Little or no card revenue. A merchant cash advance is not available in any meaningful form. Revenue based finance may work, though if you invoice other businesses on credit terms, invoice finance is normally cheaper and a better structural fit.

One point applies to both. Neither is cheap capital, and the flat fee obscures that by not looking like an interest rate. Before choosing between them, it is worth testing whether you qualify for conventional lending at all, which is the ground we cover in cash advance versus business loan.

Both products price the same way. A flat fee, commonly between 1.1 and 1.5, is applied to the advance to fix the total repayable, and that total does not move with time. Early repayment saves nothing in either case unless the provider specifically offers a settlement discount. Neither quotes an APR, so comparing either against a bank facility requires converting the flat fee into an annual equivalent first.

Both also sit in the same regulatory position. Advances to limited companies are commercial agreements outside the Financial Conduct Authority consumer credit regime, with no statutory cooling-off period and, in most cases, no access to the Financial Ombudsman Service. Sole traders and small partnerships borrowing under the relevant threshold may fall within the Consumer Credit Act and gain those protections. Provider authorisation for payment services or credit broking does not extend to the advance itself, and the Financial Services Register will tell you what any firm is actually permitted to do.