A merchant cash advance (MCA) is a type of business financing in which a company advances you a lump sum that you repay via a percentage of your daily credit card and debit card sales, plus a fee. Technically, a merchant cash advance is not considered a business loan; it’s actually you selling your future debit and credit card transactions at a discount.
Typically, merchant cash advances are repaid on a daily or weekly basis and the financing company takes the payment automatically from your payment processor. In this way, repayments are based on your sales—if you experience a slow in sales, your payments will also be lower but it will take you longer to repay the advance.
Merchant cash advances are usually easy to qualify for (even if you’re a startup or have bad credit) and fund quickly; however, they’re known for high APRs—and because they’re not actually business loans, there’s little regulation around merchant cash advances. Generally, you’ll want to consider all of your options for business financing before turning to a merchant cash advance.
|Max. Advance Amount||Repayment||Factor Fee||Speed|
|Up to $500,000||Paid daily or weekly via your merchant or bank account||Typically ranges from 1.1 to 1.5||As fast as one day|
Traditionally, merchant cash advances work like this:
Unlike most other types of business loans, merchant cash advances do not have set annual percentage rates or repayment terms.
Because MCAs typically draw from your debit and credit cards sales, they’ve often been used by businesses that rely on those sales for revenue—restaurants, bars, retail stores, salons, etc.
However, some financing companies will draw repayments directly from your bank account (instead of a merchant account), meaning even businesses that don’t rely heavily on debit or credit card sales can utilize this type of financing. In this case, the process essentially works the same, except the merchant cash advance company connects to your bank account and collects repayment, plus fees, using ACH withdrawals.
Because MCA providers can plug-in to your bank account or merchant service provider, merchant cash advances are easy-to-access, fast to fund products. They are, however, one of the most expensive financing products on the market.
As we’ve mentioned, merchant cash advances are expensive—and therefore, it’s important to understand how MCA financing companies charge fees. Just as MCAs are structured differently than most business loans, the way you’re charged interest on this financing product is different as well.
Instead of an interest rate, merchant cash advance financing companies measure their fees with a factor rate, sometimes referred to as factor fees. The factor rate you receive on an MCA will be based on the company’s evaluation of your qualifications. Typically, factor rates range from about 1.14 to 1.48.
As with traditional interest rates, the higher your factor rate, the higher the fees you’ll pay, and the more your merchant cash advance loan will cost. Generally, if you convert factor rates to an APR, you’ll find that rates start at 15%, but can reach as high as over 100%.
It’s also important to note that some MCA financing companies will charge additional fees—most often, you’ll see an “administrative fee” that is charged to set up your account. Make sure you understand all the costs of a merchant cash advance before agreeing to one.
Whereas traditional business term loans have set a repayment period—you repay a loan with monthly payments over a term of five years, for example—merchant cash advance terms do not work the same way.
As we’ve mentioned, you repay the funds you’ve borrowed from an MCA with your debit and credit card sales, or from withdrawals from your bank account. Most often, these payments are made on a daily basis, but sometimes companies will offer a weekly basis.
Because the repayments are based on your sales, the terms of an MCA will vary. In other words, you’ll repay the advance for however long it takes to cover the total amount you received plus fees.
Overall, the average repayment time for a merchant cash advance is eight or nine months. However, the term could be as short as four months or as long as 18—it all depends on your business. To this point, paying the financing company a higher fixed percentage of your sales will equal a shorter repayment time—but also a tighter cash flow.
Here’s an example of how a merchant cash advance works—and perhaps more importantly, how much an MCA costs.
Let’s say you’re advanced $20,000 from a financing company to fund some renovations for your retail shop. The financing company is charging a factor rate of 1.18.
If you multiply the $20,000 by 1.18, you’ll get $23,600—which is the total amount you’ll need to repay with your daily debt and credit card transactions.
The merchant financing company will take 15% of your credit card sales to cover that amount. How much you’ll actually pay on a daily basis will vary based on your sales. The higher your sales, the faster you’ll be able to pay off the advance.
This being said, let’s say you estimate $25,000 per month in credit card sales. If you divide $25,000 by 30 days in a month, you’ll get approximately $833 per day.That means you’ll pay $125 every day, or 15% of $833.
At $125 a day, it will take 189 days (roughly six months) for you to repay the total amount of $23,600. Although $125 per day may not seem like much, when it comes down to it, the APR on this merchant cash advance loan is nearly 66%—which is extremely high.
This is why MCAs can be so misleading—at first glance, the numbers seem reasonable and a factor rate of 1.18 seems low. However, when you calculate the APR on these products, they often end up being very expensive, especially in comparison to other types of business financing.
For this reason, before you agree to a merchant cash advance from a financing company, you’ll always want to convert the factor rate to an APR to determine the true cost of this debt and decide whether or not it’s something you can afford.
At this point, you may have started to see some of the inherent advantages and disadvantages of a merchant cash advance. Therefore, in order to help you decide if this type of financing might be right for your business, let’s break down these pros and cons in greater detail.
Ultimately, it’s up to you to determine whether or not a merchant cash advance is right for your business. If you think the fast funding and flexible qualifications outweigh the cost, you’re likely wondering how to start the application process.
First and foremost, you’ll need to find a merchant cash advance company to work with. Due to the lack of regulation in the MCA industry, you’ll want to ensure that the company you choose is trustworthy and reliable. It can be helpful to read company reviews and talk to other business owners who have worked with them.
If you’re looking for a place to start your search, you might consider:
Once you’ve found a company, you should be able to apply online, quickly and easily. The qualifications are typically flexible—even if you have bad credit or little time in business, you’ll likely still be able to get approved for a merchant cash advance.
Generally, MCA companies will look at your credit card processing or bank statements to ensure that you have enough sales volume coming into your business.
Additionally, you might be asked for more traditional business loan requirements, such as:
Typically, MCAs won’t require collateral; however, some companies may require that you sign a personal guarantee.
All in all, you should be able to complete the merchant cash advance loan application process and receive funds as fast as the same day.
If you decide that a merchant cash advance is not right for your business, you’ll want to know where to go next to find financing. Overall, we’d recommend exploring any and all alternatives to MCAs first—as other types of financing will be much more affordable.
This being said, many business owners turn to merchant cash advances because they have bad credit or are new businesses—and they don’t think they can qualify for other products. With the expansion of alternative lending, however, there are a variety of options these businesses can turn to before looking into an MCA. Let’s explore some of those solutions:
Although it may be difficult for some businesses to qualify for a bank loan or long-term loan from an online lender, many lenders are more flexible with their short-term loan products. Like MCAs, these short-term business loans typically have simple applications and can fund very quickly. Unlike MCAs, these loans will have a traditional loan structure with payments over a set period of time.
Additionally, even though short-term loans may have higher interest rates than some other products, they’ll be much more affordable than a merchant cash advance. Here are some options to consider:
Short-Term Loan Alternatives
|Lender||Eligibility Criteria||Loan Amount||Cost and Term Length|
One year in business; $100,000 annual revenue; 625 credit score
$5,000 – $250,000
Interest rates start at 29.9%*; terms up to 24 months
Six months in business; $15,000 monthly revenue; 500 credit score
$5,000 – $400,000
Factor rates start at 1.15; Six- to 18-month term
*Interest rates range from 29.9% to 97.3% (based on loans originated in the half-year ending March 31, 2022).
Like short-term loans, business lines of credit are another top alternative to MCAs and are often viable options for startups or businesses with bad credit.
On the whole, business lines of credit are one of the most flexible forms of financing—not only can they be used for any purpose, but they also allow you to draw on a credit line, only paying interest on the funds you draw, not the total amount of your credit line.
In addition, most lines of credit are revolving—meaning once you’ve repaid what you borrowed, your credit line resets to the original limit. Here are some top business line of credit options to consider as an alternative to a merchant cash advance:
Business Line of Credit Alternatives
|Lender||Eligibility Criteria||Loan Amount||Cost and Term Length|
Two years in business; $30,000 monthly revenue; 650 credit score
$5,000 – $250,000
4.8% – 51% interest rate; Six- or 12-month term
Two years in business; $15,000 in monthly revenue; 650 credit score.
Up to $250,000
1.115 – 1.193 factor rate, 12-month term;
1.17-1.296 factor rate, 18-month term
At the end of the day, if your business makes a large portion of revenue through debit and credit card payments, you may find that a merchant cash advance is a helpful short-term financing tool—offering an easy application process and fast funding.
In general, however, you’ll want to consider any and all alternative funding options you have before turning to an MCA. As we’ve discussed at length throughout this guide, a merchant cash advance will be one of the most expensive forms of financing out there—with APRs that can reach over 100%.
Therefore, before you look into merchant cash advance companies, start your funding search with some of the options we’ve mentioned, like short-term loans or business lines of credit.