Merchant loans: know exactly what you are signing before you take the money

A merchant loan is business funding raised against the money a business takes through its card terminals and online checkout. In the payments industry any business that accepts cards is a merchant, so the label covers the shop, the restaurant, the salon, the garage, the pub and the online seller alike. What defines the product is the security: the funder advances against your card sales, not against property or a director's house.

The problem is that no UK regulator, trade body or lender maintains a product called a merchant loan. Search the phrase and you land on three genuinely different things wearing one label: a merchant cash advance, an ordinary unsecured business loan, or the funding programme attached to whoever supplies your card machine. The answers feel inconsistent because the question has been answered three ways.

We keep the vocabulary honest here. When we write merchant loan we mean the search term and the category it points at. When we mean an advance we say advance, and when we mean a loan we say loan. Everything starts from what a merchant loan actually is.

The product most often sold as a merchant loan is a merchant cash advance. A funder pays you a lump sum today and buys, in exchange, a fixed amount of your future card sales at a discount. Nothing is lent, so nothing is borrowed. You have sold something you did not yet have, and you deliver it as your customers pay you.

Everything else follows from that. There is no interest rate and therefore no APR to compare, because cost is fixed by a factor rate that typically sits between 1.1 and 1.5. There is no term and no monthly instalment, because the funder is entitled to a percentage of takings, typically 5 to 20 percent, rather than to a payment on a date. A quiet month simply delivers less, which is the genuine attraction of the structure for any business whose revenue swings.

It also changes what protects you. Provided to a limited company, an advance is an unregulated commercial agreement outside the Financial Conduct Authority's consumer credit perimeter, so there is no standardised cost disclosure, no statutory cooling-off period and, in most cases, no ombudsman route. Agreements with sole traders and small partnerships can in some circumstances fall within the Consumer Credit Act. We take the whole distinction apart in is a merchant cash advance a loan.

The firms marketing merchant loans in the United Kingdom belong to four different kinds of business, and the difference decides who makes the credit decision, whose terms you sign and how much of the market you are seeing.

• Direct funders underwrite and provide the money from their own book. Capify and 365 Business Finance are long-standing merchant cash advance specialists; broader funders such as iwoca and Nucleus Commercial Finance offer revenue-linked funding within a wider range.
• Embedded platforms build the underwriting and funding, then run it inside somebody else's brand. YouLend and Liberis are the names most often behind a UK offer of this kind.
• Acquirers and terminal providers offer funding to merchants they already process for, including Barclaycard, Lloyds Cardnet, Worldpay, Dojo and SumUp, with the same pattern online through PayPal Working Capital and Stripe Capital.
• Brokers and introducers hold no money and put your requirement to a panel. A good one saves real time; a lead generator simply sells your details on.

None of these is inherently better, and we publish no rankings, because the pricing that would justify one is quoted per business and is not fixed. What each structure means for you as a customer is set out in merchant loan companies. Detailed write-ups of the individual UK funding programmes sit on our sister site's provider reviews.