What are merchant loans?

Did you know you might use your debit and credit card machine as a way of raising business finance?

So-called merchant loans allow you to do just that – raising a potentially much-needed injection of business funding by borrowing against anticipated receipts from your credit card machine.

This is one form of business finance and is backed by the security of takings from your debit and credit card sales.

How do business loans work?

The principle is really quite simple and straight forward.

The potential lender examines your record of debit and credit card sales to establish what level of income these generate for your company. Typically, you will need at least six months of such records, so that the lender may calculate a monthly average of your income from such sales.

Clearly, you therefore need to have enjoyed an income from card sales and the qualifying amount is likely to vary from one merchant loans provider to another. The government website suggests that you need to have been taking a minimum of £2,500 a month from card sales – but to attract more favourable offers from any lender you might prefer to aim for a minimum of £3,500 a month.

Based on your eligibility:

  • the lender may then offer to advance an amount of cash – the merchant loan – which is backed by the anticipated takings from your credit card machine or machines;
  • the merchant loan is repaid by your agreeing to pay an agreed percentage – the “split percentage” (typically, between 10% and 30%) – of your monthly card machine takings;
  • the repayments are made until the balance of the initial advance, plus the lender’s charges and commission, is repaid;
  • naturally, the amount you repay each month varies according to the income your card sales have generated, but merchant loans are typically calculated for repayment within about six months to one year.

The advantage of a merchant loan, therefore, is that repayments are automatically tailored to the card sales you have made in any one month – the more you have earned, the more you are able to repay, under the “split percentage” rule.

How much can you borrow?

Once again, this is likely to vary from one lender to another, but the range cited on the government website is a useful guide and suggests amounts of between £2,500 and £300,000. Naturally, the upper limit is determined by the amount you are earning from card sales, the split percentage you agree with the lender, and the assessed risks of your maintaining previous performance with respect to card sales.

The great advantage with merchant loans, of course, is that your monthly repayments remain automatically in line with actual takings from card machine sales. The “split percentage” agreement means that the more you earn, the more you are able to repay, so clearing the outstanding balance of the loan more quickly.

By the same token, whenever card sales take a seasonal or monthly dip, you repay a lesser amount, taking longer to repay the loan. This may be a worry if your repayments extend the anticipated loan repayment period.

As with all financial matters, it is important you weight up the pros and the cons of this method of business finance to make sure it offers the most appropriate solution for you.

Don’t take card payments?

For businesses who do not take card payments, and who need a loan, there are other business finance options available such as short-term business loans.

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