Merchant Capital: Everything You Need to Know

Updated on December 30, 2020
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What Is Merchant Capital?

Merchant capital is working capital that’s advanced to merchants—or small business owners that accept card payments—to help them cover the day-to-day expenses of operating their business. In most cases, a small business owner pays the advance of merchant capital back by allowing the merchant capital provider to tap into the business’s daily card revenues.

Merchant capital is a relatively new form of funding, and it goes by many names: a merchant cash advance, merchant capital, merchant financing, or just a cash advance.

If you don’t know anything about merchant capital, or are considering using it for your small business, we’re here to answer any and all questions you might have about this business financing option.

In this guide, we’ll walk through everything there is to know about merchant capital—from where to find it to the best alternatives.

Merchant Capital vs. Traditional Business Loans

When you think “business financing,” business loans are probably what pops into your head first.

Small business loans are a common way to fund your business, and they come in many shapes and sizes—fitting a variety of financing needs.

Does a merchant cash advance fit into the traditional small business loan mold?

Not exactly. Let’s take a closer look into how merchant loans work.

How Does a Merchant Capital Work?

With a merchant cash advance, lenders offer an immediate lump sum of capital to a borrower. In exchange, the borrower pays that lump sum of cash back—plus a fee.

Sounds a lot like a traditional term loan, right?

Well, here’s where it gets different.

In order to collect repayment from the borrower, the lender takes money from the business’s future credit card and debit card sales.

When you use merchant capital, you’re agreeing to let your merchant capital provider automatically deduct a predetermined percentage of your business’s daily credit card and/or debit card sales.

Think of it this way: you’ll make less on every sale you make until your merchant capital provider gets paid in full.

Merchant Capital: Getting Into The Details

Let’s walk through just how a small business owner can take out a merchant capital advance.

First, you’ll submit an application to your chosen merchant capital provider. You’ll hear back from the lender within a couple of days—making merchant capital one of the quickest small business loans available.

Once you’re approved, you’ll get a lump sum of capital into your bank account. To collect repayment, the merchant capital provider will take out an agreed upon percentage from your business’s daily credit card sales.

Here’s a big difference between merchant capital advances and small business loans: to repay a traditional business loan, you’d be making fixed daily, weekly, or monthly payments—according to a present repayment schedule. When you use merchant capital, you make daily payments that’ll vary from day to day.

Merchant capital providers will take a fixed percentage from your sales. So if you’re having a fantastic week, the lender will take more from your sales volume. If you’re seeing slower sales and not bringing in as much, lenders just take less from your credit card sales.

One advantage of the merchant capital structure is that, unlike with a term loan, you’re not punished when you have slower sales weeks. If you aren’t making as much, you just pay less.

How Long Will It Take To Pay Off a Merchant Capital Advance?

On average, a merchant cash advance will take about 8 or 9 months to pay off.

But, the repayment time frame can be as short as 4 months and as long as 18.

Your merchant cash advance term will depend largely on your business and the agreed upon slice the lender takes from your credit card sales—which will vary between each loan agreement.

If you agree to let the merchant capital provider take a higher fixed percentage of your credit card sales, you’ll have a shorter repayment time.

Why? Well, the lender will end up taking more from your sales every time they collect—meaning that’ll collect the loan amount in full, faster.

It might seem great to get this debt off your hands quickly, but remember: the higher the fixed percentage, the tighter your cash flow.

What Will Merchant Capital Cost?

As we mentioned before, merchant capital providers will take a fee for the lump sum cash advance.

What does this fee look like?

Instead of measuring their fees in interest rates, merchant capital providers will typically use factor rates. A factor rate is what you multiply your loan amount by to figure out what you’ll owe the merchant capital provider in total.

Factor rates on merchant cash advances typically range from 1.14 to 1.48.

And when you consider what a merchant capital advance will cost you in terms of APR, you can expect a 15 to 80% APR—and sometimes even higher depending on which merchant capital provider you’re working with. If you hit the high end on your merchant capital’s APR, this business financing option can really put a dent in your finances.

Let’s put some numbers to a merchant cash advance.

  • The Cost of Merchant Capital: An Example

    Say you apply for a merchant cash advance, and you’re advanced $20,000 with a factor rate of 1.18.

    By multiplying $20,000 by 1.18, you get $23,600—that’s what you’ll need to repay the lender in full with your daily credit card sales.

    Are you just paying an 18% interest rate? Definitely not. To understand what the true cost of your loan, you need to convert your factor rate into APR.

  • How to Translate a Factor Rate Into APR

    In order to understand what you’ll really pay, you need to convert your merchant capital advance’s factor rate into an APR.

    Let’s go back to our example. Say you’re lender is taking 15% of your daily credit card sales, and you estimate that you’ll make $25,000 a month in credit card transactions.

    This means that you’ll repay your capital advance in 189 days, with daily payments of $125.

    When you do the math, that’s an APR of 65.96%.

    Your merchant cash advance will cost you a lot more than you first thought it would.

    Merchant cash advances are expensive loan products. Because they can put such a dent in your cash flow, you need to be sure that it’s the right business financing option for you. Before you agree to any merchant capital arrangement, be sure to check what your APR will be with a business loan calculator.

Merchant Capital: The Advantages and Disadvantages

Merchant Capital: The Advantages

Now that you know just how a merchant capital advance works, let’s consider who it works for, and why you’d want to use one.

  • Fast Access to Capital

    For any business owner, there comes a time when you need capital quickly. Maybe an opportunity for significant growth just presented itself, or you need to cover an unexpected business expense.

    Whatever the reason, you might need extra funds immediately. And applying for small business loans takes time and energy that a busy owner doesn’t have to spare.

    This is where merchant capital advances come in. If you need fast access to capital, a merchant cash advance could be a good fit—you can be approved for up to $250,000 in just a couple of days.

    But remember, fast cash is often expensive cash. A merchant cash advance is one of the most costly ways to finance your business, so you have to ask yourself: “Is the fast access to capital worth the cost?”

    If you think you’ll only have this debt from your merchant cash advance on your books for a short amount of time, it might make sense to take out a merchant cash advance.

  • Bad Credit is Okay

    If you gone through the process of taking out a small business loan before, then you know it can be a long and involved process.

    Plus, even if you take the time to apply for a business loan, there’s a chance you won’t qualify for it.

    For business owners that don’t meet the business loan requirements, a merchant cash advance might be a good fit.

    Here’s why: Your credit doesn’t matter as much with a merchant capital advance. Really, bad credit borrowers will qualify.

    Your personal and business credit score are some of the most important factors that lenders look at when deciding whether or not to fund your business.

    And if your credit rating isn’t where you want it to be, you might not qualify for certain loan products—SBA loans and traditional term loans, for instance, require stellar credit scores.

    Luckily, there are still business loans for bad credit—and a merchant capital advance is one of them. Most merchant capital providers will require a minimum credit score of 600.

  • Newer Businesses Can Qualify

    When it comes to qualifying for small business loans, your time in business is pretty important.

    Most lenders will want to see that you’ve lasted the first couple of years operating your business. If you’ve been around for 5 years, for example, you’ve proven that you can withstand all the many challenges that come along with running a business.

    If you haven’t been operating for a while, you might have a harder time getting approval from lenders. Certain lenders will be skeptical of your ability to stay in business, and most importantly, pay back the money they lent you. And unfortunately, there are facts to back up these lenders’ fears: according to a Small Business Administration study, two-thirds of small businesses last their first 2 years, and only half survive their first 5.

    So, if you haven’t been in business for a while, are you out of luck? Not at all.

    A merchant cash advance is a good fit for businesses that haven’t been in business for a long time. The minimum time lenders will require is 5 months.

    If you’ve just hit your 5 month mark, you might be eligible for a merchant capital advance. But, lenders will require that your business is bringing in a fair amount of revenue. They’ll want to see that you have at least $100,000 in revenue. They’re taking from your sales after all, so you’ll need to show that you have a proven revenue model before you receive your merchant capital.

  • No Collateral Required

    When you’re applying for a small business loan, you might find that lenders are requiring you to offer collateral.

    What is collateral?

    It’s basically just an asset you own. You can offer your house, car, or business’s inventory as collateral. By securing your small business loan with collateral, your lender has the right to seize the offered asset in the event you default on your loan.

    Put simply, collateral ensures that the lender won’t lose all their money if you can’t pay them back.

    If your business is just starting out, you might not have collateral to offer. Or, you don’t want to put your personal assets on the line to secure your business loan.

    When giving out merchant loans, providers won’t require that you offer collateral. If your business can’t pay back your merchant capital provider, the lender has limited legal options to recover your cash advance.

    But keep this in mind: if you don’t offer collateral, you’re considered a “high-risk” borrower. To protect themselves, merchant financing providers will charge high APRs.

  • Easy, Automatic Payments

    Busy business owners often don’t like dealing with the hassle of remembering to pay their credit accounts in time to not incur dings on their credit reports.

    And if you have a bunch of different payment accounts for your business, keeping up with the regular repayments can be difficult.

    With a merchant capital advance, though, the merchant cash company automatically deducts payments through either your payment processor or your bank account.

    This takes some of the hassle out of remembering to pay your business financing.

Merchant Capital: The Disadvantages

If you find yourself needing a quick infusion of capital or you don’t qualify for other small business loans, merchant financing might be a good fit for your financing needs.

But, there are reasons why you might be hesitant to use merchant capital.

Before you sign on the dotted line, consider these things, first.

  • Merchant Capital Is Expensive

    You’ve probably realized this by now, but it’s worth saying again and again: merchant capital is expensive.

    Don’t be fooled by your factor rate, it’s not the same as an APR. When you consider the cost of a merchant cash advance in terms of APR, you could be paying an 80% APR. This cost can cause serious cash-flow problems if you aren’t careful.

    APRs on merchant loans will depend on the provider, the size of the advance, any extra fees, how long it takes to repay the advance in full, and how strong your credit card sales are. When you consider all these factors, your APR can really skyrocket.

    Before you commit to merchant financing, make sure that your cash flow and financials are strong enough to make up for the significant cost of the loan.

  • Merchant Capital Advances Require High Daily Payments

    If you allow the merchant cash advance provider to take a high percentage of your daily credit card sales, you’ll pay your debt off quickly.

    But until your lender has collected repayment in full, they’re constantly cutting into your cash flow. When you consider all the other business expenses you have to take care of to run smoothly, it might be hard to keep your cash flow strong if a large slice of your sales are automatically deducted from your account.

    Also, keep in mind that there isn’t a benefit to repaying quickly in the first place. With other small business loans, you can get interest savings by repaying your loan early—if there’s no prepayment penalty, of course. With merchant financing, there’s no benefit for getting the debt off your books—you’ll have to pay the fixed amount no matter what.

  • Merchant Capital Might Trap You Into Debt-Cycles

    Merchant capital advance should be used when you absolutely need them. Why?

    Well, with merchant financing, you run the risk of falling into a cycle of reborrowing. With their high repayment rates, merchant cash advances are meant to be paid off in under a year. But because they’re so expensive and you have to repay so frequently, you might find yourself in need of taking out another advance soon after you took on your first one.

    Struggling borrowers can easily fall into a routine of renewal after renewal, hurting your finances in the long run.

  • Merchant Capital Doesn't Build Your Credit

    You might want to take out a merchant cash advance because your credit is struggling and it’s the only option given your low score. But resorting to a merchant cash advance won’t help your credit score in the long run.

    Traditional business loans help you build up your credit, which in turn allows you to secure bigger and better business loans in the future.


    Well, most lenders report to business credit bureaus. If you’re repaying your loan on time and in full, your credit score will show it.

    But here’s the catch: merchant financing providers aren’t structured like typical lenders, so they don’t report to the major credit reporting agencies. This means that your credit score won’t benefit from a merchant cash advance. And in order to score less expensive and bigger loans in the future, you’ll want to be building your credit now.

Merchant Capital: Two Good Options

When it comes to getting merchant capital, taking out a merchant cash advance is almost always a bad idea. They’re very expensive products.

If you need access to capital as a merchant, we recommend looking at other options for finding working capital.

However, there are two business loan products on the market that are structured similarly to a merchant cash advance that can potentially be good options for business owners:

American Express merchant financing and PayPal working capital.


American Express Merchant Financing

American Express merchant financing provides business owners who accept American Express credit cards access to merchant capital.

While technically a short-term loan, Amex’s merchant financing product is similar to a merchant cash advance.

They’ll give you merchant capital that gets paid back by offering American Express access to a percentage of your daily credit card sales. Your financing will come with a set repayment term, though, of 6-, 12-, or 24-month terms.

American Express merchant financing provides working capital ranging from $5,000 to $2 million. They’ll also charge you interest in the form of a fixed fee ranging between 1.75% and 20%, depending on the details of your business and its qualification. If you qualify for a product on the lower end of that fee spectrum, this would be a very inexpensive way to access merchant capital.

PayPal Working Capital

If you’re looking for merchant capital and you happen to be a PayPal seller, then you should consider PayPal working capital.

Again, PayPal working capital isn’t a merchant cash advance. However, it’s structured like one.

If approved for PayPal working capital, you’ll receive instant access to funds in your PayPal account. To repay, PayPal will take a fixed percentage (between 10% and 30%) plus fees from your PayPal account each day.

Your fee depends on the details of your business, but all in, a PayPal working capital loan is a more affordable alternative to other merchant capital solutions.

Should You Refinance Your Merchant Capital Advance?

If your merchant cash advance is seriously hurting your business’s financials, you might want to consider refinancing your merchant financing.

Put simply, refinancing your loan means that you’re paying one loan off with the proceeds of another one.

Why would you want to refinance your merchant cash advance?

Well, here are three reasons to:

Refinancing Merchant Capital for Lower Rates

Taking out another loan to pay off your first one makes sense if that second loan comes at a lower interest rate. If this is the case, your business debt can be made a lot more affordable, limiting the damage of your merchant capital advance.

Refinancing Merchant Capital for Longer Terms

Another reason to refinance?

If that second loan comes at a longer term—you’ll have more time to pay off the money you borrowed. You’ll lower your repayment amount, and your business’s finances will thank you.

Refinancing Merchant Capital to Get More Funding

This one is pretty simple: the second loan will come with a larger pile of cash that you can use to grow your business. If you refinance with a larger loan, you can put more capital into your business without worrying about multiple loans at once.

A portion of that second loan will of course go towards paying off your first. But, if you still have a substantial pile of cash left over from paying off your merchant loan, refinancing makes sense.

Alternatives to Merchant Capital Financing

Before you take out a merchant capital loan, you should make sure it’s the right fit for your small business.

If, in the decision process, you think a merchant cash advance isn’t a smart decision for your business financing, here are some alternatives you can pursue.

Short-Term Loans

If you were attracted to merchant capital because you needed financing quickly and you don’t have a fantastic credit rating, you might want to consider a short-term loan, instead.

With a short-term loan, you’re given a lump sum of capital, which you’ll pay back, plus interest, over a fixed repayment period.

With short-term loans, the interest rate you get will depend on your credit score. So if you have less-than-stellar credit, you might still be taking out an expensive loan. But, short-term lenders almost always report to business credit bureaus. So using a short-term loan is a smart move if you have bad credit and need to build up your score.

Business Credit Cards

The lack of collateral requirement is a pretty attractive feature of the merchant cash advance.

But, if this is the reason you’re taking out a merchant cash advance, you might consider business credit cards instead.

With a business credit card, you can get the financing you need for your small business quickly, without having to offer any collateral. Plus, you can cover your business expenses while also earning rewards—like points, travel benefits, or cash back.

Another bonus of business credit cards is that your time in business doesn’t matter (similarly to merchant capital). You can take out a business credit card the day you open your business, and use it to cover your early-on expenses.

Business Lines of Credit

business line of credit works similarly to business credit cards, and is an excellent alternative to merchant cash advances.

When you take out a line of credit, you’re given a pool of funds, which you can draw on whenever you want or need to. You’ll only pay interest on what you draw from your credit line, and once you repay, your line of credit is refilled to its original amount.

Just like merchant financing, lines of credit are good options for borrowers with bad credit.

But here’s the plus side: taking out a line of credit is a fantastic way to build your business credit. This is a perk that you definitely won’t benefit from with merchant capital.

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Meredith Wood
Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email:
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