What Is a Merchant Cash Advance and Is It Right for You?

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) gives your business a lump sum of cash upfront. In exchange, you agree to pay it back through a percentage of your future sales. It's one of the fastest ways to get business funding - often within 24-72 hours.

Here's the important distinction: an MCA is not technically a loan. It's a purchase of your future revenue. A funding company buys a portion of your future sales at a discount, gives you the money now, and collects their share from your daily or weekly deposits until the total is paid back.

This matters because MCAs don't follow the same rules as traditional loans. There are no required APR disclosures in many states, no federal interest rate caps, and fewer consumer protections. That's not necessarily a reason to avoid them - but it is a reason to understand exactly what you're getting into.

How a Merchant Cash Advance Works

The MCA process is straightforward. Here's how it works from start to finish:

Step 1: You Apply

You provide basic business information: bank statements (usually 3-4 months), proof of business ownership, and a government-issued ID. Most MCA providers don't require tax returns, business plans, or detailed financials.

Step 2: You Get Approved

Approval is based primarily on your business revenue and bank deposits - not your credit score. If your business deposits $10,000+ per month consistently, you'll likely get approved. Credit scores as low as 500 can qualify.

Step 3: You Receive a Lump Sum

Once approved, funds hit your bank account - often within 24-72 hours. Some providers fund same-day.

Step 4: Daily or Weekly Repayment Begins

This is where it gets real. There are two common repayment methods:

• Percentage-based (holdback): The provider automatically deducts a fixed percentage (usually 10-30%) of your daily credit card or debit card sales. If you have a slow day, the payment is smaller. Busy day, it's larger.
• Fixed ACH withdrawal: The provider pulls a fixed dollar amount from your bank account every business day (or weekly), regardless of your sales. This is more common now.

Repayment typically takes 4-18 months depending on the advance amount and your revenue.

Key MCA Terms You Need to Know

• Factor rate: The multiplier that determines your total repayment. Ranges from 1.1 to 1.5 (more on this below).
• Holdback rate: The percentage of daily sales withheld for repayment (typically 10-30%).
• Advance amount: The lump sum you receive. Usually ranges from $5,000 to $500,000 or more.
• Purchased amount: The total amount you owe (advance x factor rate).
• Remittance: Your daily or weekly repayment amount.

What a Merchant Cash Advance Really Costs

This is where most business owners get surprised. MCAs don't use interest rates. They use factor rates - and if you don't understand the difference, you can't compare costs accurately.

How Factor Rates Work

A factor rate is a simple multiplier. Multiply it by your advance amount, and you get the total you owe.

Example: $50,000 advance × 1.4 factor rate = $70,000 total payback. That's $20,000 in fees on a $50,000 advance.

Factor rates typically range from 1.1 to 1.5. The better your revenue and business history, the lower your factor rate.

Factor Rate vs. APR: The Real Comparison

When you convert MCA factor rates to an equivalent APR (annual percentage rate), the numbers are eye-opening:

Compare that to a SBA loan at 10-13% APR, or a business term loan at 8-30% APR. The cost difference is massive.

Who MCAs Are For (and Who They're Not For)

MCAs aren't for everyone. Here's an honest look at who benefits - and who should look elsewhere.

An MCA Might Be Right If:

• You need capital fast - A revenue opportunity, emergency repair, or time-sensitive purchase that justifies the higher cost
• Your credit is below 600 - Traditional lenders won't touch you, but MCA providers focus on revenue, not credit
• You've been in business 6+ months - Most MCA providers require at least 6 months of bank statements
• You do $10,000+/month in revenue - This is the typical minimum for approval
• You have a clear plan to use the money for growth - Buying inventory that generates 3x the cost, seizing a contract, covering a seasonal surge

An MCA Is Probably Not Right If:

• You're behind on rent and playing catch-up - An expensive advance on top of existing cash flow problems rarely solves the problem. It usually makes it worse.
• You have good credit (640+) and time (2-4 weeks) - You likely qualify for a term loan or line of credit at a fraction of the cost
• Your credit score is 700+ - You might qualify for credit stacking with 0% APR for 12-18 months
• You have strong financials and can wait 60-90 days - An SBA loan will save you thousands in the long run
• You don't have a plan for how the money generates revenue - Taking expensive capital without a return plan is a recipe for a debt spiral

Honest Pros and Cons

We're not going to sugarcoat this or scare you away. Here are the real pros and cons:

The Pros

• Speed: Funded in 24-72 hours. No other funding product comes close.
• Easy qualification: Revenue-based approval. Credit scores of 500+ accepted. Minimal paperwork (bank statements, ID).
• No collateral: No assets pledged. No lien on your equipment or property (though some providers file a UCC lien as a formality).
• Flexible use: Use the money for anything - inventory, payroll, marketing, equipment, expansion. No restrictions.
• Revenue-based repayment: With holdback-style MCAs, payments flex with your sales volume. Slow month = smaller payment.

The Cons

• Expensive: Factor rates of 1.2-1.5 translate to 40-150%+ APR. This is the most expensive form of business funding.
• Daily cash flow impact: Daily or weekly automatic withdrawals can strain your cash flow, especially on slow days.
• Limited early payoff savings: With most MCAs, you owe the same total amount whether you repay early or not. Some providers do offer early payoff discounts, but it's not standard across the industry.
• No credit building: Most MCA providers don't report to business credit bureaus. On-time payments won't improve your credit profile.
• Less regulation: MCAs aren't subject to the same federal lending protections as traditional loans. Disclosure requirements vary by state.
• Stacking risk: Taking a second MCA before the first is paid off can create a dangerous debt spiral (more on this below).

Red Flags and the Danger of MCA Stacking

MCAs themselves aren't predatory. But some providers are, and some patterns of MCA use can put your business in real trouble.

Red Flags When Shopping for an MCA

• No clear disclosure of factor rate and total payback - If a provider can't tell you exactly what you'll repay, walk away.
• Pressure to sign immediately - Legitimate providers give you time to review terms.
• Extremely high factor rates (1.5+) - At these rates, the math almost never works in your favor.
• Confessions of judgment clauses - Some MCA contracts include clauses that let the provider seize your assets without going to court first. Several states have banned these, but check your contract.
• Stacking offers - A provider offering you a second advance before your first is paid off is a warning sign, not a favor.

What Is MCA Stacking?

MCA stacking is when you take out multiple cash advances at the same time. You have two (or more) providers pulling daily payments from your bank account simultaneously.

Here's what that looks like in practice:

• MCA #1: $300/day withdrawal
• MCA #2: $250/day withdrawal
• Total: $550/day leaving your account before you pay for anything else

At $550/day, that's roughly $12,100/month just in MCA payments. For most small businesses, that's unsustainable.

MCA vs. Other Funding Options

One of the biggest mistakes business owners make is choosing an MCA without knowing what else is available. Here's how MCAs compare to other products on the same $50,000:

*Based on $50,000 funding amount. Actual costs depend on credit, revenue, and lender terms.

The difference is dramatic. On $50,000, an MCA might cost you $20,000-$25,000 in fees over 6 months. An SBA loan on the same amount costs roughly $2,000-$5,000 over 10 years. That's $15,000-$23,000 more for the MCA.

But here's the thing: if you don't qualify for an SBA loan or can't wait 60-90 days, those lower rates don't help you. The cheapest option you can't get isn't really an option.

Frequently Asked Questions