Merchant Cash Advance
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Are you a small business owner who needs cash immediately, but is having trouble qualifying for a traditional type of financing like a term loan? If so, a merchant cash advance (MCA) is worth considering.

A merchant cash advance might be the right option for your small business, but this small business financing option has both pros and cons that you should carefully consider before making a decision. In addition, not all merchant cash advance companies are created equal, so you want to take steps to ensure you’re picking a good one.

This guide will teach you all about MCAs, helping you to make the right choices for your small business.

What is a merchant cash advance?

A merchant cash advance provides upfront cash to a small business owner in exchange for a piece of future sales. MCAs were originally designed for businesses that relied heavily on credit card sales or debit card sales, with lenders simply taking a percentage of the future transactions. Now, MCAs are available to small business owners who do not derive most of their sales from credit card transactions or debit card transactions, with repayment coming through smaller, regular (daily, weekly or bi-monthly) payments.

In some cases, an MCA can be structured based on a percentage of your sales. In other cases, an MCA is based on an estimate of your future sales and does not fluctuate based on your actual sales. We will go into more detail on how MCAs work in the next section.

For borrowers who have low credit scores and don’t have a long track record, an MCA may be one of the only small business funding options. But there’s no such thing as a free lunch, so merchant cash advances carry high annual percentage rates (APRs) – sometimes as high as triple-digits – to compensate lenders for the higher risk.

Since merchant cash advances are an expensive small business financing option, you should either a) desperately need the short-term cash flow or b) have an excellent long-term investment opportunity for your business that has a greater projected return than the cost of securing the lump sum amount.

How does a merchant cash advance work?

With traditional bank loans, a borrower typically agrees to fixed repayment terms, which makes it simple and straightforward to calculate an interest rate. But that isn’t typically the case with merchant cash advances.

Here’s an example that illustrates how it usually works:

You apply to borrow a lump sum amount from a merchant cash advance company, let’s say $100,000. Based on an estimate of your future sales, the company figures out a percentage that would allow it to recoup the lump sum (plus fees) over an agreed-upon repayment period, perhaps three to 12 months. You are projected to make $200,000 in credit card sales over the next 12 months, so the merchant deducts 10% of your sales (likely to be $20,000 a month) until you repay the merchant cash advance plus fees.

The fees are calculated through the use of a factor rate, which depends on your perceived risk as a borrower and the merchant cash advance company; it is typically somewhere between 1.2 and 1.5. A factor rate of 1.4 would mean that in this example you would have to repay $140,000 ($100,000 * 1.4). So, assuming your actual sales match your projected sales, you would pay your MCA back in seven months ($140,000 / $20,000).

Since the repayment is based on your future sales, an MCA provider uses the factor rate instead of calculating an interest rate. If your sales came in at $350,000 a month, for example, you would repay the merchant cash advance in four months, instead of seven. If your actual sales were $140,000 a month, you would repay the merchant cash advance in ten months. So, you actually end up paying a higher APR if your sales come in above expectations, and a lower APR if your sales are lower than forecasted.

You don’t have to tie your MCA repayments to your future sales, though.

There’s another way that merchant cash advance providers structure agreements: doing fixed daily or weekly debits from your bank account. The MCA would still be based on your projected future sales, but the repayments wouldn’t fluctuate based on your actual sales. So, in the previous example, you would pay back $20,000 a month regardless of whether or not your future credit card sales were higher or lower than $200,000.

Is a merchant cash advance right for your small business?

Now that you understand how merchant cash advances work, let’s dig deeper and look at the pros and cons of using an MCA.


It’s fast and easy to get an MCA.

Do you need cash for your business bank account… but did you need it yesterday? If so, a merchant cash advance may be the right small business financing option for you. The application process for an MCA is typically simple and straightforward, and if approved, you should be able to get your lump sum in a few days or less.

There are typically low minimum requirements.

To get a merchant cash advance, you are unlikely to need to meet high minimum requirements. MCA providers are usually lenient on credit score, time in business, and monthly sales. This makes MCAs an attractive option for startups that have bright outlooks but may struggle to secure traditional loans because of bad credit and the lack of a track record.

They are unsecured.

A merchant cash advance company won’t require you to provide physical collateral, so you won’t have to put your business assets at risk to secure an MCA. That said, many MCA providers will insist on a personal guarantee, so they can still come after you if you are unable to repay the MCA.

When your sales are lower than expected, your payment may be lower than expected.

This depends on whether you opt to repay your MCA with fixed payments or as a percentage of future sales, but if you go with the latter option, you can take comfort in knowing that if your sales are lower than expected, you won’t have to repay your MCA as quickly. For businesses with tight margins, this can be a game-changer. For example, if your net profit margins hover around 15%, a merchant cash advance that deducts 10% of your future credit card sales may be a relatively safe option for your business.


There is a high APR.

With other types of business loans, you may be able to get single-digit rates. With merchant cash advances, however, your APR – including all costs – could be 40% to 350%. The APR depends on a number of factors including the company and how long it takes to repay the MCA, but the APR is not competitive with traditional small business financing options.

When your sales are higher than expected, your payment may be higher than expected.

The fact that MCA repayment terms can depend on your sales is a pro in some situations… but a con in other situations. If your sales come in much higher than expected, for example, you could end up paying a sky-high APR. Let’s say you are offered a $50,000 fixed amount with a factor rate of 1.2, for a total repayment of $60,000. You expect to pay back $10,000 a month, repaying the full amount in six months, for an APR of 40%. If you were able to repay the $60,000 in three months, though, your APR would come out to 80%.

If you pay back the MCA faster than expected, you don’t save any money.

Here is another issue with paying back the MCA early: you don’t avoid the built-in interest payments. With a small business loan, you may be able to pay less interest if you pay it back early.

You could put your small business on shaky ground.

As you can tell, if you get a merchant cash advance, you are likely going to end up paying back much more than the amount that you borrowed. This means that your business needs to perform well over the three to 12 months after you secure the merchant advance, or you could have an MCA provider chasing you down for repayment at the same time that your small business is struggling. You don’t want to avoid a merchant cash advance out of fear, but you should consider the likelihood that you’ll be able to pay it back, and the risks if you are unable to.

Top 5 Tips to Choose a Merchant Cash Advance Company

If you’ve decided that you want a merchant cash advance, the next step is to choose a merchant cash advance company. Here are the top 5 tips for choosing the right one:

  1. See if there’s an easy application process.

As mentioned earlier, it’s typically simple and straightforward to apply for an MCA, but that isn’t always the case. When you’re shopping around, you should ask prospective merchant cash advance companies what their application process entails. In many cases, you will just be asked to provide bank statements and other basic documentation.

  1. Compare the factor rates.

With factor rates, a seemingly small difference can make a huge difference in your APR. For example, a merchant cash advance with a 1.2 factor rate and six-month repayment period will have an APR of 40%. What if the factor rate was 1.25, though? The APR would be 50%.

  1. Look for a company that is a good fit for your business.

There are some merchant cash advance companies that specialize in helping companies with very low credit scores… but they have higher than average factor rates. Other MCA companies have more stringent requirements but offer more reasonable factor rates. You should look for an MCA provider that is designed to help businesses like yours.

  1. Check the reviews.

As with any transaction in your business or personal life, you can check the reviews to learn about the experiences of others with merchant cash advance companies. You can find a company that is a good fit for your business by seeing if other small business owners with similar businesses have had positive experiences with them. Look for reviews from reliable sources, and see how the MCA provider responds to customers that have issues.

  1. Read the fine print.

A merchant cash advance company may present you with terms that seem attractive on the surface, but if you dig deeper, that won’t always be the case. There are some MCA companies that have hidden fees that could make a merchant cash advance more expensive than it appears at first glance.

Biz2Credit Can Help You Find the Best Merchant Cash Advance

With Biz2Credit, you can get a merchant cash advance, as our platform connects small business owners with several lenders that offer this small business funding option. We designed our platform to offer both speed and quality; you can quickly gain access to the best merchant cash advance offers and have the money in your bank account in a few days or less.

Learn more about how Biz2Credit can help your small business.

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