Merchant cash advance vs revenue-based finance: what is the difference?
By Helm, Business Funding Specialists
- Both products tie repayments to business revenue rather than fixed monthly amounts
- A merchant cash advance specifically uses card transaction data for repayments
- Revenue-based finance can use broader revenue sources including bank transfers and invoices
- The best option depends on what proportion of your income comes through card payments
If you have been researching flexible business funding, you have probably come across both merchant cash advances and revenue-based finance. The two terms are sometimes used interchangeably, but they are not identical products.
Understanding the difference matters because the right choice depends on how your business generates income. Picking the wrong product could mean higher costs or a repayment structure that does not match your cash flow.
How a merchant cash advance works
A merchant cash advance provides a lump sum of capital that you repay through a fixed percentage of your daily card transactions. The provider connects to your card terminal or payment gateway and automatically deducts the agreed percentage from each card sale.
This means repayments are directly linked to your card revenue. Busy days mean higher repayments. Quiet days mean lower ones. If you process no card transactions on a given day, you make no repayment.
How revenue-based finance works
Revenue-based finance also ties repayments to your business income, but it uses a broader definition of revenue. Instead of relying solely on card transactions, it can factor in bank transfers, direct debits, invoice payments, and other income streams.
Repayments are typically collected as a percentage of total revenue, often through a direct debit arrangement linked to your business bank account. This makes it accessible to businesses that do not rely heavily on card payments.
Key differences at a glance
While both products share the principle of flexible, revenue-linked repayments, the mechanics differ in several important ways.
| Feature | Merchant cash advance | Revenue-based finance |
|---|---|---|
| Repayment source | Card transactions only | All revenue sources |
| Collection method | Automatic from card terminal | Direct debit from bank account |
| Repayment frequency | Daily (per transaction) | Weekly or monthly |
| Revenue tracking | Card processor data | Bank account or accounting data |
| Best for | Card-heavy businesses | Businesses with mixed income |
| Typical advance range | £10,000 to £300,000 | £10,000 to £500,000 |
| Speed of funding | 24 to 48 hours | 3 to 7 days |
Which one is right for your business?
The answer depends primarily on how your customers pay you. If the majority of your revenue comes through card payments, a merchant cash advance is likely the better fit. The automatic repayment collection is seamless, and the process is typically faster.
If a significant portion of your income comes through bank transfers, invoices, or direct debits, revenue-based finance may be more appropriate. It captures a wider picture of your business income and can offer larger advance amounts.
- Choose a merchant cash advance if 70% or more of your revenue is through card payments
- Choose revenue-based finance if you have significant non-card income streams
- Consider your preference for daily vs weekly or monthly repayment frequency
- Factor in speed of access, as merchant cash advances are typically faster
Can you use both?
In theory, you could use both products at different times, but using them simultaneously would mean a combined repayment burden that could strain your cash flow. Most businesses choose one or the other based on their revenue profile.
If your business model changes over time, for example moving from a card-heavy retail operation to a mix of online and wholesale, you might find that switching from one product to the other makes sense.
Cost comparison
Both products use a factor rate rather than an interest rate, which means the total cost is fixed from the outset. However, the factor rates can differ between the two products.
Merchant cash advances typically carry factor rates between 1.15 and 1.5. Revenue-based finance rates are similar but can sometimes be slightly higher due to the additional complexity of tracking broader revenue streams. Always compare the total repayable amount rather than the factor rate alone.
Frequently asked questions
Is a merchant cash advance the same as revenue-based finance?
Not exactly. Both tie repayments to business income, but a merchant cash advance uses card transactions specifically, while revenue-based finance can use broader revenue sources including bank transfers and invoices.
Which is cheaper?
Costs are comparable, but merchant cash advances can sometimes offer lower factor rates because the repayment collection through card terminals is simpler and lower risk for the provider.
Can service businesses use a merchant cash advance?
Service businesses can use a merchant cash advance if they process a significant volume of card payments. If most of your income comes through invoices or bank transfers, revenue-based finance may be a better fit.
Do either product require a personal guarantee?
Most merchant cash advance providers do not require a personal guarantee. Revenue-based finance providers vary, so it is worth checking before you apply.