Merchant Cash Advance For Restaurants

Growing your restaurant business using our merchant cash advance services

Compare MCA loans for restaurants in the UK.

Discover how a Merchant Cash Advance can be a game-changer for restaurant owners seeking quick and flexible funding solutions.

In today’s fast-paced and increasingly competitive environment, UK restaurant owners need short-term capital to support their business operations and optimise growth. One of the financial solutions available to restaurant owners is a Merchant Cash Advance (MCA). In this article, we will explore MCAs, their relevance within the restaurant industry, their advantages and disadvantages, application processes, and strategies for repayment.

Understanding Merchant Cash Advances

Definition of Merchant Cash Advance

MCAs (Merchant Cash Advances) are a type of cashflow finance where a business receives a lump sum of cash in exchange for a portion of future card sales. Unlike traditional loans, MCAs do not require fixed monthly repayments, making them an attractive option for restaurant owners who may experience fluctuating month-on-month revenue.

Repayments are typically structured as a percentage of daily card sales, which means they adjust with a restaurant’s trading performance. This flexibility allows restaurants to better manage their monthly cash flow during slower sales periods. Additionally, since the repayment is tied directly to sales, restaurants can avoid the pitfalls of overextending themselves financially during off-peak times, ensuring they can maintain operations without the burden of fixed repayment schedules.

How Does a Merchant Cash Advance Work?

When a restaurant opts for a Merchant Cash Advance, the process typically begins with an application. Restaurant credit card sales are evaluated by MCA lenders, who often require at least three months’ worth of records. Based on this financial information, the MCA lender will determine the cash the restaurant can receive.

Once approved by a lender, the restaurant will receive funds almost immediately, which can be used for various purposes, e.g. purchasing stock, paying off debts, taking on staff or funding premise renovations. Repayments are automatically deducted from daily restaurant card sales, which can benefit business owners worried about missing loan payments. This seamless integration into the business’s daily operations allows owners to focus more on customer service and less on financial logistics. Furthermore, the speed at which funds are paid out can be crucial for restaurants needing immediate capital to seize time-sensitive opportunities, such as a bulk purchase of seasonal ingredients or last-minute repairs to keep the establishment running smoothly.

The Need for Cash Advances in the Restaurant Industry

Common Financial Challenges in the Restaurant Business

Managing the finances of a restaurant can be challenging.

Seasonal fluctuations, staffing costs, and stock management can create significant financial strain. Additionally, restaurants often face unexpected expenses, such as equipment repairs or staff replacement costs, e.g. the need to find a chef quickly, which can put pressure on cash flow.

The perceived risk associated with restaurants may also discourage traditional banks from lending to them. As a result, many turn to alternative financing options like Merchant Cash Advances to bridge the gap during challenging times. This reliance on alternative funding can often be a double-edged sword; while it provides immediate relief, it can also lead to a cycle of debt if not managed carefully. In addition, restaurants must constantly invest in training and retaining their staff, which can drain financial resources due to high staff turnover rates.

Why Choose a Merchant Cash Advance?

MCAs offer several advantages for restaurant owners. The main one is the speed of funding, allowing restaurants to meet immediate financial needs without the lengthy application processes typical of bank loans.

In addition to providing flexibility in terms of repayments, they can adapt to the restaurant’s cash flow. This feature is particularly helpful in the hospitality industry, where takings can vary drastically from day to day.

For instance, a restaurant might experience a surge in customers during the weekend due to good weather or a local event, only to see a sharp decline during the rest of the week. This variability means that having a repayment plan that aligns with cash flow can significantly ease running a restaurant business.

Lastly, merchant cash advances are generally easier to qualify for, making them an accessible option for many restaurant owners who may lack adequate credit scores or substantial capital, e.g., non-homeowners. This accessibility is essential for minority-owned or family-run establishments, which often face additional barriers in securing traditional financing.

An MCA can provide a valuable lifeline to small businesses, enabling them to invest in marketing and facility upgrades, expand their menu offerings, and enhance their competitiveness in the area where they operate.

Worked Example of an MCA for a Restaurant

A Merchant Cash Advance (MCA) is a flexible funding solution where a business receives a lump sum upfront in exchange for a percentage of future credit or debit card sales. Here’s a worked example for a restaurant in the UK that requires £10,000 in funding, with repayment projected over 24 months.

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Example Details

1. Funding required: £10,000
2. Repayment term: Approximately 24 months (repayments are tied to sales, so the term is flexible).
3. Advance fee: 25% of the advance (this is typical and equates to £2,500 in fees). Total repayment = £10,000 + £2,500 = £12,500.
4. Repayment mechanism: A fixed percentage of card sales is deducted daily or weekly.
5. Average monthly card sales: £6,000.
6. Repayment percentage: 10% of card sales (agreed between the lender and the business).

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Step-by-Step Calculation

1. Calculate monthly repayments:
   The restaurant agrees to repay 10% of its monthly card sales (£6,000 average):£6,000×10%=£600 per month£6,000 \times 10\% = £600 \text{ per month}£6,000×10%=£600 per month
2. Estimate repayment term:
   To determine how long it will take to repay the total of £12,500:Repayment term=£12,500£600≈21 months\text{Repayment term} = \frac{£12,500}{£600} \approx 21 \text{ months}Repayment term=£600£12,500​≈21 months, however, because sales fluctuate, the repayment term could vary. If sales drop, it could take longer than 21 months; if sales increase, the term could shorten.
3. Daily repayment (optional):
   If the lender collects repayments daily (assuming 30 days/month):£600÷30≈£20 per day deducted from card sales.£600 \div 30 \approx £20 \text{ per day deducted from card sales}.£600÷30≈£20 per day deducted from card sales.

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Impact on the Business

• Flexible repayments: If sales slow down (e.g., £4,000/month), the repayment reduces:£4,000×10%=£400 per month.£4,000 \times 10\% = £400 \text{ per month}.£4,000×10%=£400 per month. In this case, the repayment term extends (e.g., 31 months instead of 21 months).
• Cost of borrowing: The MCA fee (25%) makes this a relatively expensive form of borrowing compared to traditional loans. The effective annual percentage rate (APR) can be significantly higher than other options, though its flexibility mitigates this.

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Key Considerations

1. Cash flow: Repayments are tied to sales, so there’s less risk of fixed monthly payments overwhelming cash flow during slower months.
2. Total cost: £2,500 in fees is a high cost for a £10,000 advance, equating to an effective cost of borrowing of 25%.
3. Shorter repayment term if sales increase: If the restaurant exceeds £6,000/month, the advance is repaid faster, potentially reducing the financial burden.

This worked example highlights the flexibility and cost of a Merchant Cash Advance. It’s often suitable for businesses with consistent card sales but may not be the cheapest financing option.

Evaluating the Pros and Cons of Merchant Cash Advances

Benefits of Merchant Cash Advances for Restaurants

Quick access to funds is one of the key benefits of a Merchant Cash Advance. In contrast to traditional loans, which can take weeks to approve, MCAs are typically approved and funded quickly.

Restaurant owners can react quickly to opportunities or crises because of their agility. It can be a game changer if a restaurant needs to purchase new kitchen equipment or invest in marketing during a slow season due to a lack of sales.

Variable repayment structures are also beneficial during off-peak seasons when sales decline. Since repayments are tied to sales, restaurant owners can conserve cash during slower months. This flexibility allows restaurant owners to manage their cash flow more effectively, ensuring they can cover expenses like payroll and stock without worrying about fixed loan repayments.

Last but not least, traditional financing typically requires more documentation than the straightforward application process of an MCA. Smaller or new businesses may not possess the extensive financial history banks require, lowering the entry barrier.

Several UK MCA providers understand the unique challenges faced by the restaurant industry and tailor their lending solutions accordingly.

Potential Drawbacks and Risks of MCAs

Despite their advantages, merchant cash advances do not have drawbacks. Compared to traditional loans, MCAs typically have high fees and interest rates. In this way, businesses can get caught up in a cycle of borrowing, where businesses take out new advances to pay off previous ones. The cumulative effect of these costs can be particularly damaging for restaurants operating on tight margins, as they may be trapped in a perpetual cycle of debt that hinders long-term growth prospects.

Additionally, because repayments are based on a percentage of sales, the costs can become unsustainable during a downturn. Those restaurants that receive an advance but don’t see an increase in sales may face a difficult financial situation. Economic downturns and shifts in consumer behaviour can exacerbate this problem, which is often out of the business owner’s control. The unpredictability of sales can make it challenging to budget and plan for the future.

Additionally, due to the lack of regulation in the MCA sector, terms can vary widely, so business owners should thoroughly research and understand all terms before agreeing to anything.

Restaurant owners must seek advice from specialist commercial finance brokers to navigate the complexities of MCAs and ensure they are making informed decisions that align with their long-term business goals.

How to Apply for a Merchant Cash Advance

Eligibility Criteria for Merchant Cash Advances

Merchant Cash Advances are typically based on a restaurant’s debit & credit card sales history. Most lenders look for businesses with a minimum monthly sales volume, often set at around £5,000 in the UK. This benchmark ensures that the restaurant can meet its MCA repayment obligations.

Furthermore, lenders consider the overall health of the business, including factors such as how long the business has been operating (in the UK, a minimum of 6 months is usually required, while most will want 12 months of trading history), existing debt levels, and the restaurant owner’s creditworthiness. Whilst criteria will vary by lender, having a robust sales history can improve the chances of approval.

The Application Process Explained

The application process procedure for a Merchant Cash Advance is generally straightforward. Restaurant owners must provide debit & credit card processing statements, business bank statements, and business IDs.

Next, you can approach lenders directly or work with a specialist MCA finance broker who understands the market and can take the strain out of the application process. After submitting the application and relevant documents, an MCA lender will review the information and decide whether to lend.

Assuming a favourable decision on approval, MCA funds are typically transferred within a few business days, giving restaurant owners immediate access to capital to address their financial needs.

Repaying a Merchant Cash Advance

Understanding the Repayment Structure

A Merchant Cash Advance is unique because its repayment is directly related to the restaurant. Lenders will deduct a predetermined percentage from the sales until the advance is fully repaid. This dynamic repayment structure can ease the financial burden during periods of lower sales activity.

Unlike conventional loans, this model does not impose fixed payments, allowing for a more manageable approach to debt. Depending on the advance terms, restaurant owners must be aware that the total repayment cost may be significantly higher. Ultimately, an MCA is a means to an end.

Tips for Managing Repayments

To effectively manage repayments on a Merchant Cash Advance, restaurant owners should closely monitor their trading cash flow. Regularly reviewing sales trends and expenses can provide insights into when adjustments are necessary.

Creating a detailed budget that accounts for the advance repayments alongside regular operating expenses can help business owners avoid financial pitfalls. In addition, prioritising cash reserves during busy periods can create a buffer for months with lower sales.

Lastly, maintaining open communication with the lender can be beneficial. If facing challenges, restaurant owners should reach out to discuss potential adjustments to their repayment terms.