What are merchant loans?

What are merchant loans?

You might view your card machine as a simple way of facilitating payments by your customers for the goods and services they buy from you.

But did you know that your debit and credit card machine may also be a handy source of additional business funding – through merchant loans?

What is a merchant loan?

Merchant loans are short-term business loans on which security is provided by way of your income from debit and credit card sales.

They work like this:

  • the lender advances an amount of cash backed by your predicted takings from your card machine or machines;
  • you repay the lender each month according to an agreed percentage of your card machine income;
  • those repayments are made until the balance of the initial loan, plus the lender’s commission and charges, are repaid;
  • this is typically calculated to last for around six months, but of course depends on the amount initially advanced, the income you actually receive from card sales, and the percentage of the loan you repay each month.

The precise amount of the initial advance and the fixed rate of the lender’s commission and charges mean that you know the exact cost of such borrowing – and this may be factored into your cash flow budget.

Business finance through merchant loans

Different merchant loan providers have different limits on the amount you may borrow in this way – the government website, for example, suggests that it might be as much as £300,000, but this is likely to vary considerably from one merchant lender to another.

Clearly, you need to have been trading and using your card machines for some time – say, a year or more – so that the lender may base any advance on the anticipated debit and credit card sales. It may be, for instance, that the lender takes an average of your card income over the past six months.

You must also agree with the lender the percentage split – the percentage of your card machine takings that you repay each month to clear the initial loan. Typical percentages are between 10% and 30%. In other words, if your takings amount to £30,000 and you agreed a 20% split, you repay £6,000 each month until the loan is repaid.

The advantages

For businesses that rely heavily on card sales – such as retail and leisure industries – merchant loans have the advantage of your being able to repay the borrowing in line with the income you actually receive from your trading activities and card sales. If your income is high for the month, the percentage split means that you repay more – and may, therefore, clear your debt to the merchant lender more quickly.

If takings are down, however, you do not need to find so much to repay the lender.

This is in contrast to a standard fixed-rate, unsecured business loan, of course, where you need to find the same instalment to repay each month, regardless of sales and the actual performance of your business.

By the same token, however, there may be times when you may welcome the greater certainty of a standard business loan and the ease of budgeting for both your cash flow and working capital balance that is ensured by repaying a fixed amount each month.

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