With budgets tightening and uncertainty reigning supreme, SMB cash flow is a critical focus. Ensuring your business has the funds it needs to pay staff and make savvy investments is crucial. 

But what do you do when cash gets tied up or runs out? 

Cash advances give businesses access to the funds they need, when they need them most. They’re a fast and efficient way to turn anticipated revenue into cash in the bank. 

This article explores how they work, who they work best for, and how to find the right one for your SMB.  

What is a merchant cash advance?

A cash advance is short-term financing that enables a company to cover a one-off funding requirement. It is used to bridge a gap between cash receipts and cash disbursements: a customer who pays late, an order to be fulfilled, wages to be paid or urgent expenses.

In practical terms, a cash advance can take several forms:

• An authorised overdraft on your bank account
• A traditional cash loan (repayable within 3 to 12 months)
• An advance on customer invoices (sometimes called factoring)
• Supplier financing (“reverse factoring” or deferred payment)
• Alternative financing through solutions like Defacto

These advances can also go by other names like bridging loans, AP financing, or working capital lines of credit. 

Why do SMEs face cash flow issues?

Lack of cash is not (always) linked to poor management. It’s often a direct consequence of normal business operations, stemming from common situations:

• Long payment terms: average customer payment terms can exceed 45 days. And plenty of customers are even slower, which leaves you out of pocket for longer.
  
  
• Temporary imbalances: these can come from inefficient collections, high utility bills or charges, and large one-off payments.
  
  
• Rapid growth: more orders equals more stock and more staff. And this can lead to larger short-term financing requirements.
  
  
• Seasonality or long business cycles: in industry or food processing, the production cycle can last several months before invoicing.

Example: an industrial SME receives an order for €300K. To meet it, it needs to buy €150K of raw materials immediately, but won't be paid for them for another 90 days. Without a cash advance, it has to refuse the order... or take cash from elsewhere in the business.

Why consider a cash advance?

For SMBs, cash flow management is a bit like oxygen: you don't worry about it while you're breathing normally. But it’s a huge problem when things go wrong. 

A cash advance makes it possible to navigate urgent issues and avoid the worst case scenario. It acts as a shock absorber. It's not always comfortable, but can be a survival or growth lever, depending on the situation.

When to use cash advances strategically

• To smooth out peaks in activity: in the high season, you may need to increase stocks or recruit temporary staff. An advance enables you to absorb this peak without jamming your organisation.
  
  
• To respond to large, unexpected orders: you need to invest upstream (bring in raw materials or subcontractors) before you can invoice. An advance means you don't have to turn down an exciting opportunity.
  
  
• To deal with the unexpected: this includes equipment breakdowns, supplier price rises, and customer delays. You stay in control of your timetable.
  
  
• To avoid making counter-productive short-term decisions: blocking recruitment, postponing a project, or cutting supplier deadlines. All of which send negative signals to your partners.

To put it plainly, a cash advance is not a way of “plugging a hole,” but of staying the course in an unstable environment. It makes you more agile, more responsive, and less dependent on unforeseen events.

The advantages and disadvantages of cash advances

Advantages:

• Responsiveness: Most solutions can be set up quickly, within a few days or even hours.
  
  
• Flexibility of use: Unlike a traditional bank loan, you (hopefully) don't need to give lengthy reasons for using the funds. You finance a one-off need at your own pace.
  
  
• Preservation of working capital: By using a targeted advance, you avoid touching your cash reserve or delaying major payments.
  
  
• No dilution of capital: Unlike raising capital, you retain 100% control of your business.
  
  
• Use à la carte: some solutions let you finance a single invoice or a one-off requirement, without committing to a long-term loan.

Example: a 12-strong digital agency with long-term projects often gets paid within 60 days. An advance on this invoice means you can continue to pay salaries without waiting for customer payments.

Disadvantages:

• Higher cost than long-term financing: a cash advance is a fast and flexible service, but it comes at a price. To be used on a targeted basis, not structurally.
  
  
• Limited duration: this financing generally has to be repaid within 30 to 120 days, which requires good visibility of future income.
  
  
• Risk of dependency: if used incorrectly, advances can become a crutch and mask a structural problem with profitability or your business model.
  
  
• Partner selection: not all solutions are created equal. Some are not very transparent or impose hidden charges. That's why it's important to compare, and to focus on clarity and speed.

How to obtain a cash advance

There are several solution, with very different timescales, levels of flexibility and conditions of access. The right choice depends on your needs: one-off or recurring? Predictable or urgent? Financing a customer or a supplier? Here's an overview.

1. Bank overdraft

This is the most classic form: your bank authorises a temporary negative balance on your current account. It's quick if you already have a track record, but it's capped, inflexible and often renegotiated every year.

• Lead time: 1 to 2 weeks (except in emergencies).
  
  
• Limitations: low ceilings, little flexibility, and conditions that are difficult to negotiate for small organisations.

2. Short-term cash credit

Amortisable loan (or bullet loan) over 3 to 12 months. Can be used to finance an identified need (growth, inventory, or one-off working capital requirement). Generally more accessible to organisations with at least 2 strong balance sheets.

• Lead time: 2 to 4 weeks.
  
  
• Limitations: file to be compiled, slow process, not suitable for urgent needs.

3. Factoring

Your company transfers its receivables to a factor, which pays you a portion of the funds immediately, then the balance when the customer collects. Very effective in certain sectors, but often cumbersome for small SMEs.

• Lead time: 1 to 3 weeks.
  
  
• Limitations: lengthy contracts, multiple charges (administration fees, service commission, interest), and assignment of receivables is mandatory in many cases.

4. Deferred supplier payment

You can negotiate payment terms of 30, 60 or 90 days with your suppliers. This is useful for smoothing out cash outflows, but depends entirely on your negotiating power and the strength of your commercial relationship.

• Lead time: immediate (if accepted).
  
  
• Limitations: not always possible, sometimes creates commercial tension or penalties.

5. Fintech solutions (including Defacto)

These are new solutions purpose-built for SMBs, letting you finance one or more invoices (customer or supplier) in minutes. No long-term commitment, simple and fully digitized pricing.

• Lead times: complete your application in less than 27 seconds.
  
  
• Advantages: ultra-flexible, paperless, and can be managed directly from your tools (ERP, accounting software, etc.).
  
  
• Limitations: need to connect your financial data (open banking or accounting).

Example: a food company receives a large order in June. It uses Defacto to advance supplier payment, ensure delivery, and be paid at the end of July without stress.

Why Defacto may be the solution for your SMB

Do you have an invoice to pay or collect, but not enough cash readily available? Defacto offers a simple, fast and transparent alternative for financing the cash flow needs of your business.

You connect your bank accounts or accounting tools, submit the invoice, and receive the funds within 24 hours. There's no need to change banks or persuade an advisor: everything is done online, independently, and you'll receive a response on eligibility in less than 27 seconds.

Defacto's advantages:

• Fast: financing in just a few clicks, with no paperwork
• Automated: your eligibility is analysed in real time
• Transparent: no hidden charges, interest calculated daily
• Flexible: early repayment without penalty
• Connected to your tools: Pennylane, Quickbooks, Sage, and more

‍Example: an SME in the building and public works sector receives a supplier invoice for €25,000 to be paid within 10 days. Thanks to Defacto, it obtains the advance, pays its supplier, and reimburses in 60 days as soon as its client pays. No tension, no blockage.

How does it work?

• Eligibility analysis in just 27 seconds
• Financing in less than 24 hours
• Integrate your bank account and bookkeeping tools
• Submit and receive funds based on customer or supplier invoices
• Repayment when you choose (up to 120 days)

Defacto can finance up to eight months of working capital requirements for SMEs with a turnover of between €500K and €20M.

Better cash management means acting quickly

A cash advance is not a substitute for a sound small business cash management strategy. But it’s a decisive tool for securing your business and increasing your flexibility. 

Today, the solutions are there: it's just a question of choosing the right one.

Defacto offers rapid access to cash when you need it, without unnecessary complexity. And above all, you stay focused on what matters: your business, your customers, your growth.