What is a Merchant Cash Advance?

Cash advances are a useful financial option for businesses when cash gets tight. If a business has their cash flow interrupted but wants to expand its operations, a merchant cash advance can be a great option. Unlike other financing, a cash advance is not a loan. A merchant cash advance gives a company access to funds based on their future sales or receivables.

Originally, a merchant cash advance was a small business finance strategy that provided a lump-sum payment (cash advance) to a business owner which was to be paid back using a percentage of the proceeds from future credit card or debit card sales. The term is now commonly used to describe various merchant loan structures that are short-term (usually within 24 month), that are repaid through smaller, regular (daily or weekly) payments, versus monthly payments and longer terms like a traditional bank loan.

Technically, a merchant cash advance (MCA) is not a loan. It's a commercial agreement where the business owner sells their future credit card sales to a finance company or other third party.

Merchant Cash Advance Quick Facts

  • Which Business Owners Typically Use a Merchant Cash Advance?

    Merchant cash advances are suitable for a wide range of business owners who have a steady credit card/debit card business. Retail stores and restaurants are some of the most common types of businesses that use a merchant cash advance.

  • Qualifications for a merchant cash advance

    A merchant cash advance will generally cost more than other types of business financing and should be used only in times of urgent cash need and when the business owner has a reasonable expectation of repaying the loan in a short period of time.

    One of the benefits of this type of funding is that many lenders have liberal standards to qualify. That means if you have less than good credit rating, a limited operating history and little or no collateral, you can still qualify.

    Typical business owners who qualify have:
    • A credit score of 525-550
    • $150,000-$200,000 in annual revenue
    • Been in Business 18-24 months
  • Applying for a Merchant Cash Advance

    In addition to relaxed requirements to qualify, the application process and documentation to apply for a merchant cash advance are relatively simple. The following documents are what you will need to complete your application:

    • Credit Card Processing Statements
    • Driver's License
    • Voided Business Check
    • Bank Statements
    • Credit Score
    • Business Tax Returns
  • Is there a Difference between a Merchant Cash Advance and a Business Cash Advance?

    The short answer is yes. There is a technical difference, yet the two terms are often used interchangeably. Many people use the terms merchant cash advance and business cash advance interchangeably. However, you may experience that some lenders who offer business cash advance programs that don't operate like traditional merchant cash advances.

    For example, instead of paying back with a fixed percentage of your daily credit card sales, you may be required to repay the loan with a set percent of your total sales. In most cases, payments are made via ACH withdrawal. Like an MCA, because repayment is based on percentages of sales, you pay more when business is good and less when business is slow. As your payments fluctuate based on your sales, there is no set term.

Merchant Cash Advance The Pros and the Cons

Like most financing arrangements, there are advantages and disadvantages to a merchant cash advance. A MCA is generally used by business owners who have been rejected by their bank or other traditional lenders for a business loan. Because the repayment terms are based on automatically deducting payments automatically, they are easier to get.


  • They are fast

    A MCA is one of the fastest loans available. Average turnaround for most business-owners is just a few days. Because the decision is weighted most heavily upon the credit card records of the company, there is a limited amount of paperwork, which accelerates the decision-making process.

  • Poor Credit is often accepted

    Once again, because lenders get paid directly from credit card recipts, there is less default risk and therefore credit ratings are relatively less important.

  • The Cash Advance is unsecured

    MCA is an unsecured loan so you do not need to pledge collateral and you are not personally liable in the event the company is unable to repay the loan.

  • Payments Are Correlated to Health of Business

    Because you pay a percentage of sales, you pay less when sales ae slower (less revenue-smaller payment) and more when business is good (more revenue-higher payment).


  • MCA's are expensive

    The annual percentage rate, or total annual borrowing cost with all fees and interest included, may be in a range between 40% to 350%, depending on the lender, the size of the advance, any extra fees, how long it takes to repay the advance in full and the strength of the business's credit card sales. This is far more expensive than other alternative business funding methods. A MCA is generally known as the most expensive for of business borrowing plan.

  • Higher Sales often means a higher APR

    If you agree to repay your MCA as a percentage of credit card sales the APR may depend not just on the total fees paid but also on the pace at which you repay the loan. If your sales are weak, your payments will be lower and it will take you longer to repay. In that case your APR drops. If credit card sales are high, you repay the MCA faster and, subsequently, APR goes up. For example, the company might offer you a $100,000 MCA with a factor rate of 1.25, for a total repayment of $125,000. If you repay it in just six months, the APR would be a minimum of 50%. If you repay it in 12 months, the APR would be a minimum of 25%.

  • There is no savings if you pre-pay

    Because you are paying a fixed amount as a percentage of sales you get no interest savings if you pre-pay.

  • There is little or no regulation

    Because it is not considered a loan, an MCA is not covered by Federal government regulation like most other loan types. They are treated as commercial transactions and in most cases they are subject to general uniform commercial code (UCC) rules. The bottom line is that business owners must exercise extreme diligence when entering into such an agreement.

  • Contracts can be complex

    While there is relatively little paperwork, MCA's can come with complex legal contracts. It is wise to consult an attorney or at the very least, carefully read the contract before signing.