The short answer, and why the label matters
A merchant cash advance is not a loan. A funder pays you a lump sum today and buys, in exchange, a fixed amount of your future card sales at a discount to face value. Nothing is lent, so nothing is borrowed. What you owe is not a debt for money advanced but an obligation to deliver receivables you have already sold.
That sounds like lawyers' bookkeeping until you look at what follows from it. Because there is no loan, there is no interest and therefore no APR to compare. Because there is no lending of a sum for a period, there is no maturity date and no instalment. Because the agreement is a sale rather than credit, an advance to a limited company sits outside the consumer credit regime the Financial Conduct Authority administers, which is where most of the protections a borrower expects actually live.
Providers are usually accurate about this in their documents and looser about it in their advertising, where words like lending, borrowing and repayment appear because they are the words customers use. That is not necessarily bad faith, but it does mean the marketing and the contract describe different things, and only one of them binds you. If a page invites you to apply for a merchant loan and the agreement you are sent is headed as a purchase of future receivables, the agreement is what you have.
The rest of this guide works through the practical consequences: cost, term, regulation, protections, default and personal exposure. We are an editorial site rather than a law firm, and nothing here is legal advice, but knowing which questions to put to a funder before you sign is most of the value.
What a loan is, and what an advance is instead
A loan has a recognisable shape. One party advances a sum of money to another, the borrower agrees to repay that sum, and the price of having the money for a period is interest. The obligation is to pay a defined amount on defined dates, and it survives whatever happens to the borrower's trade. Every feature people associate with borrowing, from the APR to the arrears process, follows from that structure.
A merchant cash advance is built differently. The funder purchases a fixed sum of your future card receivables, and pays you a lower sum today for them. The gap between the two is the funder's return, and it is fixed at the outset by a factor rate rather than accruing with time. Your obligation is to let those receivables flow through as your customers pay, not to make payments on dates.
Two features of the paperwork usually confirm the character of the deal. The first is that the total is fixed and does not grow: an advance at a factor rate of 1.3 delivers the same total whether that takes eight months or eighteen, because nothing is accruing. The second is that collection is defined as a percentage of card settlements, not as an amount per month, so the contract has no schedule to fall behind on.
Substance decides the position, not the heading on the page, and an agreement dressed as a purchase but drafted with the features of a loan may be treated as one. That is a question for a solicitor on the specific wording rather than something to judge from a website, and where a funder cannot explain plainly which of the two you are being offered, that itself is useful information. Our companion guide on what a merchant loan is covers the wider vocabulary problem.
No interest rate means no APR to compare
The most immediate consequence of the purchase structure is that the cost of an advance is not expressed as a rate of interest, and cannot be, because interest is the price of borrowing over time. Cost is set instead by a factor rate, a multiplier typically between 1.1 and 1.5 applied to the advance to fix the total you will deliver. Advance £30,000 at 1.25 and you deliver £37,500. The £7,500 is the cost, and it does not change.
Because there is no APR, the standard comparison tool does not work. APR exists precisely so that products of different shapes and durations can be lined up on one number, and a factor rate defeats that by omitting duration entirely. Two businesses can sign identical agreements at the same factor rate and pay very different effective annual costs, because one delivers the total in seven months and the other in twenty.
The practical method is to convert rather than to compare. Work out the total in pounds, estimate the delivery period from your own card volume and the holdback percentage, and then judge the cost against the period. A short delivery period on a high factor rate can produce an annualised equivalent well above what most business borrowers expect, and it is the combination rather than either number alone that produces the surprise.
It also changes what early settlement means. On a loan, paying down early cuts the interest still to accrue. On an advance the total is already fixed, so clearing quickly costs the same money over less time, which raises the effective rate rather than lowering the bill. Some funders will discount an early settlement as a commercial gesture; it is worth asking whether yours will and getting the answer in writing, because there is no automatic right to it.
No fixed term, and what that does to repayment
An advance has no maturity date. The funder is entitled to a percentage of your card takings, typically in the 5 to 20 percent range, until the agreed total has been delivered, and the calendar has nothing to do with it. Providers quote an expected duration, commonly somewhere between six and eighteen months, but that is a projection from your recent volume rather than a term you have agreed to meet.
The upside is genuine and is the main reason the product exists. A quiet month simply delivers less. There is no instalment to miss, no arrears to explain, and no default triggered by trading conditions, because you have not promised to pay anything on a date. For a seasonal business, this alignment between takings and outgoings is exactly what a fixed instalment cannot offer, and it is why funders can work with revenue patterns a term lender will not touch.
The cost of that flexibility is a permanent claim on your gross card revenue. Every card sale arrives reduced by the holdback until the advance is delivered, which tightens working capital in precisely the months when it is already tight. Businesses with thin margins should model the holdback against gross margin rather than against turnover, because a 15 percent holdback on takings can absorb a very large share of what is actually left after cost of sales.
One more consequence follows. Because there is no term, there is also no schedule against which to measure progress, so it is easy to lose track of how much remains. Ask how the outstanding balance is reported and how often. A funder that shows a running figure through a portal or a monthly statement is easier to manage than one where you have to ask.
Regulation: limited companies, sole traders and the Consumer Credit Act
Because a merchant cash advance is not credit, an advance provided to a limited company is an unregulated commercial agreement, outside the consumer credit perimeter the Financial Conduct Authority supervises. The parties are treated as businesses dealing at arm's length, and the terms they agree are largely the terms that govern them.
The position for unincorporated businesses is less uniform. Agreements with sole traders and small partnerships can in some circumstances fall within the Consumer Credit Act, which extends certain protections to smaller unincorporated borrowers, and whether they do turns on the structure of the particular agreement and the facts around it. It is not something to assume in either direction. If you trade as a sole trader, ask the provider directly whether it treats the agreement as regulated and what that means for your rights, and take advice on the answer if the sums are material.
Provider conduct is not entirely unpoliced even where the product is unregulated. Many established UK funders belong to industry associations with codes of practice, several are authorised for other regulated activities they carry out, and general law on misrepresentation, unfair contract terms and unconscionable bargains still applies. But none of that is the same as regulated lending, and none of it delivers the standard complaints route that regulated borrowing does.
The practical significance is that diligence sits with you. Check who you are actually contracting with, whether that entity is a funder or a broker, whether it appears on the Financial Services Register for any activity, and what the agreement says about complaints and disputes. Where the funding is arranged through a specialist introducer, ask how they are paid, because an introducer's fee affects nothing about the product but everything about the advice you are getting.
The protections you do not get, and the ones you keep
The absence of consumer credit regulation removes a specific set of protections that borrowers are used to having without thinking about them. It is worth naming them, because their absence is usually invisible until something goes wrong.
- No standardised cost disclosure. There is no requirement to express the cost as an APR, so offers from different funders are not directly comparable without your own arithmetic.
- No statutory cooling-off period. Once the agreement is signed and the advance is drawn, you are committed on the terms as written unless the contract itself provides otherwise.
- No automatic right to a rebate for early settlement. The total is fixed, and any discount is a matter of negotiation.
- No Financial Ombudsman Service route in most cases. Complaints follow the contract and, ultimately, the courts, rather than a free statutory scheme. Some smaller unincorporated businesses may have access in limited circumstances, which is worth checking rather than assuming.
What you keep is ordinary commercial law. A funder that misrepresents the deal, applies terms unfairly or behaves outside its contract can be challenged, and reputable providers work hard to avoid needing to be. You also keep the ability to negotiate before signing, which is the most underused protection of all. Factor rates, holdback percentages and fee lines are commercial terms, and for a business with strong, consistent card volume they are frequently movable.
Where you want the funding arranged rather than simply explained, a specialist broker will run the same requirement past several funders and put the offers side by side. That is not this site's function; we point readers to a specialist merchant cash advance broker for that part, and we say plainly on our about page that we may earn a fee when we do.
What happens if the takings stop
This is where the distinction stops being academic. If your card sales fall, delivery slows and nothing is in default, because you have not missed a payment. That is the structural bargain: the funder took the risk of a slow trading period and priced it into the factor rate. A genuine downturn in trade is not, by itself, a breach.
What agreements do police is conduct that frustrates the funder's purchase. The obligations that typically bite are these, and they are the clauses to read closely rather than the cost lines everyone reads twice.
- Diverting card sales. Moving your card processing to a different acquirer, steering customers to cash or bank transfer, or opening a second merchant account outside the agreement is usually a breach, because it removes the receivables the funder bought.
- Ceasing to trade or selling the business. Most agreements require notice and often consent, since the receivables cease to arise.
- Insolvency events. Administration, liquidation or a winding-up petition will typically accelerate the funder's rights under the contract.
- Misrepresentation at application. Overstated card volumes or undisclosed existing advances give the funder remedies that a genuine trading dip does not.
Personal exposure is the point most often misunderstood. Many advances are supported by a personal guarantee from a director, and where they are, that guarantee is typically framed as a warranty of performance rather than a guarantee of the sum: it bites if you breach the agreement, not merely because trade was poor. It is still a personal liability, it is still enforceable, and it should be read as carefully as any other guarantee you have ever signed. If your funder asks for one, ask exactly what triggers it.
So is it a loan in any sense that matters?
In law, no. In the way it feels to run a business through, it behaves like an expensive short-term facility with an unusually forgiving repayment mechanism and an unusually weak protective framework. Both halves of that sentence are true at once, and the mistake is to hold only one of them.
Treat it as a loan when you are judging the cost. Convert the factor rate into a total, work out the likely delivery period from your own card volume, and satisfy yourself that the annualised equivalent is a price worth paying for the flexibility you are buying. Nobody signs a term loan without knowing the rate; the same discipline applies here, it just takes an extra step.
Treat it as what it is when you are judging the risk. There is no APR to lean on, no statutory cooling-off period, no ombudsman in most cases, and no automatic rebate for settling early. That places the burden of comparison and of reading the agreement squarely on you, and it makes the identity and conduct of the funder more important than it would be with regulated credit. Which types of provider exist, and what each means for you as a customer, is set out in merchant loan companies.
None of this makes the product illegitimate. For a card-taking business with uneven revenue and a short-term need, it does a job no term loan does, and for many firms it is the only funding genuinely on offer. It simply is not a loan, it should never be compared to one on the headline number, and no business should sign for one without knowing the total in pounds and the conditions that would put it in breach.