what is merchant cash advance
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Many small business owners who are desperate for cash consider merchant cash advances (MCAs). For owners of startups or those with poor credit, an MCA can seem like the only financing option for getting through a cash flow crisis, purchasing inventory, addressing an urgent need for working capital, dealing with a financial emergency, or for other business needs. Merchant cash advances technically aren’t loans, which can be a cause of confusion. Instead, it is the company purchasing your future sales, which you will use to pay them back. This article answers common questions about MCAs, so you know what you’re getting into before agreeing to get one. I’ll also explain other business funding options that could be more prudent.

merchant cash advance

merchant cash advance

What is a merchant cash advance?

A merchant cash advance is an alternative type of financing to a more traditional small-business loan. With an MCA, a financing company provides you with an upfront lump sum of cash that you repay using a percentage of your future credit card sales in addition to a fee. An MCA isn’t like a traditional bank loan. Instead, a provider purchases your future sales. You use those sales to repay the funds in addition to fees.

Who is a merchant cash advance right for?

Merchant cash advances can be a good solution for small businesses that need capital to cover cash-flow issues or immediate-term expenses.

Be aware: MCAs often come with triple-digit annual percentage rates (APRs). Paying off this type of financing can make it almost impossible for a small business to get out of debt. It’s wise to explore other small business loan options before signing up for one.

How are merchant cash advances repaid?

MCA payments can happen in two different ways:

1. Percentage of debit/credit card sales

Taking a percentage of your daily credit card sales is the conventional way to handle MCA repayments. The merchant cash advance provider automatically and regularly (typically daily or weekly) deducts a portion of your debit and credit card sales until the advance cash they provide is repaid in full. This is a big difference from traditional loans that typically require monthly payments.

Unlike more conventional small business loans, MCAs don’t come with the usual repayment terms. The repayment period is based on your sales. They typically range anywhere from three to 18 months. You can expect that if your credit and debit card sales are high, you’ll be able to repay the cash advance relatively quickly.

2. Regular fixed withdrawals from your business bank account

Some MCA providers also withdraw funds directly from business bank accounts. Fixed payments are withdrawn daily or weekly from your account, no matter how much you earn in sales. The fixed payment amount is based on an estimate of your monthly revenue, typically determined by your historical sales.

The benefit of this type of MCA repayment structure is that it allows you to calculate how long it will take to pay the MCA back. It’s typically a better option for companies that don’t have significant debit and credit card sales.

What are MCA rates and fees?

In place of a typical interest rate, MCA providers charge a factor fee. They typically range from 1.1 to 1.5, varying based on your:

  • Industry
  • Number of years in business
  • Company financial health
  • Level of credit and debit card transactions
  • Personal credit score.

Similar to traditional loans, businesses that present greater repayment risk will be assigned higher factor rates and fees.

Be aware: The factor rate also does not include fees MCA providers typically charge, including administrative and underwriting fees, which can be high and will raise your cost of financing.

How do you calculate MCA fees?

To come up with MCA costs, multiply the cash advance amount by the factor rate.

For example, if you are approved for an advance of $100,000 at a factor rate of 1.4, your total repayment amount will be $140,000. You are paying a remarkable $40,000 in factoring fees. That does not include administrative and other expenses that could significantly increase your cost of borrowing.

To truly understand the total borrowing cost of an MCA, translate the factor rate and additional fees into an annual percentage rate (APR). Taking this step will also help you figure out the time it will take to repay the advance.

Here’s what that would look like based on the previous example if the MCA provider deducts ten percent of your monthly credit and debit card for a $100,000 advance at a 1.4 factor rate.

If your monthly card sales are $100,000

Payment amount: $666 per day

Repayment term: Seven months

Total repaid (not including administrative fees): $140,000

Estimated APR: 125 percent

If your monthly card sales are $70,000

Payment amount: $466 per day

Repayment terms: Ten months

Total repaid: $140,000

Estimated APR: 87.3 percent

In this instance, paying back the merchant cash advance more quickly actually results in a higher APR. If your card sales are lower, your APR decreases. However, it takes more time to pay off the debt. In either instance, you will pay the same APR fees.

What’s essential to take away is how expensive a merchant cash advance can be. The APRs are typically much higher than most small businesses can sustain.

What are the pros and cons of MCRs?

There are benefits and significant drawbacks to merchant cash advances. 


Quick funding

The application process and approval process for a merchant business cash advance is typically quick. You can get approved fast, usually with minimal documentation like business bank statements. Many MCA providers can supply funding in as little as one business day.

Relatively easy eligibility

MCA providers may approve financing for small businesses with bad credit, startups, and those with financial difficulties. They will likely consider certain small business loan qualification requirements, but your debit and credit card transactions or business revenue will probably be a more significant factor. Ultimately, the better your qualifications, the lower the factor rate you will be granted.

No collateral or personal guarantee required

You will not need to put up personal or business assets to back a merchant cash advance.

Repayment amounts are based on your credit card receipts

Unlike other types of small business loans, your payments are based on a fixed percentage of your sales volume.


Relatively expensive form of financing

The total cost of merchant accounts is relatively high compared to traditional business loans, such as short-term loans or business lines of credit. Standard loan APRs typically range from nine to 99 percent. By comparison, MCA APRs can reach 350 percent depending on various factors, including the lender, size of the advance, fees, repayment time, credit risk, and business revenue.

Challenging to understand actual borrowing costs

Unlike traditional loan interest rates and fees, factor rates make it much more difficult to figure out exactly how much an MCA will cost you.

Frequent repayment

Merchant cash advances are typically repaid daily or weekly. Payments are deducted directly from your incoming sales or business bank account, which can negatively impact your cash flow.

Debt cycle risk

The high cost of MCAs, coupled with frequent repayments, often results in a cycle of debt that can be impossible to break out of. This is especially true if you take out additional advances because you can’t qualify for other financing options. Many small businesses fail after taking out multiple MCAs.

No early repayment benefit

Since you must repay a fixed amount of your credit card payments daily or weekly, you can’t save on interest by repaying early, a common benefit of traditional amortizing loans.

Difficult-to-understand paperwork

MCA contracts can be confusing. This is especially true when it comes to factor rates and repayment schedules that are based on percentages of your daily sales. Merchant cash advance companies don’t typically provide annual percentage rates in their agreements. This factor makes it challenging to compare MCAs with other types of small business financing.

Be aware: Some states passed laws that have forced transparency on MCA companies in recent years. However, many have not. Providers have historically been criticized for confusing agreements.

No federal government regulation

Unlike traditional forms of financing, merchant cash advances, which are considered commercial transactions, are not subject to federal rules. The Uniform Commercial Code of each state governs MCAs. This limited regulation has often led businesses to become the victims of bad actors that leverage questionable marketing and sales tactics that trick people into bad deals.

What are alternatives to MCAs?

By now, it should be clear that MCAs should be your financing choice of last resort. You should seek out alternative financing options before you agree to one.

Even if yours is a new business, or if you have a bad credit history or need funding quickly, some online lenders like Biz2Credit offer small-business loans worth considering. These include loans that make sense for immediate cash flow needs and financial emergencies, such as short-term loans and business lines of credit. You might also consider getting a business credit card which is often easy to get approved for and is an effective type of business financing for immediate cash needs.

It’s always worth checking out your options. It can help prevent a mistake that could cost you the business you’ve worked hard to build.

Learn about the Biz2Credit financing process

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