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Guide to Merchant Cash Advances (MCAs)

Merchant Cash Advance
LanternUpdated October 5, 2023
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As a small business owner, maintaining cash flow and covering essential expenses can be challenging at times. If you have limited options and need quick funding, you may consider a merchant cash advance (MCA). Keep reading to learn what a merchant cash advance is, pros and cons, when they’re used, and how to apply for one. We’ll also explore some alternatives loan options if you decide an MCA isn’t right for your business.

What Is a Merchant Cash Advance?

A merchant cash advance is a small business funding option where you receive money in exchange for future sales. MCAs are technically not loans since they offer cash up front in return for a portion of a business’s future sales, and they do not have to follow small business lending laws. Since they aren’t loans, MCAs do not require collateral and merchant cash advance companies typically won’t look at your credit scores to determine approval. However, there is little government regulation on MCAs, which can result in practices by some merchant lenders that are very costly to your business.  Recommended: Merchant Cash Advance Regulations

Merchant Cash Advance Example

Merchant cash advances charge a factor rate as opposed to a traditional interest rate. Most factor rates range from 1.1 to 1.5 depending on the lender and your specific business. Let’s assume you want a merchant cash advance for $75,000. Assuming a factor rate of 1.3, you’d pay a total of $97,500 over time to get that $75,000 now. This does not include any additional fees the lender may charge.To pay the MCA back, a portion of your daily or weekly credit card sales will be automatically withdrawn from your account. The lower your credit and debit sales are, the longer it will take you to pay back the MCA. However, the longer it takes, the lower your overall APR will be. Keep in mind, though, that MCAs are one of the most expensive forms of borrowing for small businesses.

How a Merchant Cash Advance Works

A merchant cash advance is not actually a loan, but a financing option that allows small businesses (“merchants”) to get a cash advance for business expenses in return for a portion of their future sales or receivables. Merchant cash advance companies purchase these future sales at a discount in return for offering quick financing. Repayment is typically made in one of two ways:
  • Taking a percentage of the merchant’s daily debit or credit card deposits
  • Withdrawing funds directly from the merchant’s bank account on a fixed schedule

Factor Rate Used for Merchant Cash Advances

Instead of a traditional interest rate, an MCA includes a factor rate, which is a decimal figure that reflects the total amount to be repaid on the merchant cash advance. Factor rates often range from a rate of 1.1 to 1.5, depending on the terms of the advance. Similar to how traditional lenders calculate interest, merchant cash advance companies calculate factor rates by assessing the potential risk of providing funds to your business. Items that may affect the factor rate you receive include:
  • The type of industry your business operates in
  • Your business’ financial history
  • Credit/debit card sales
  • Number of years in business
To calculate how much you could owe on an MCA, you’d typically multiply the entire amount of the merchant cash advance by the factor rate. For example, if you’re getting a cash advance of $5,000 and your factor rate is 1.3, then the total amount you’ll owe is $6,500. $5,000 × 1.3 = $6,500The factor rate does not include any additional fees that may be associated with the cash advance, so check with your merchant cash advance company to make sure you’re aware of any additional costs. This step is important, as some merchant cash advances have been known to have APRs in the triple digits.

Small Business Loan vs. Merchant Cash Advance

Merchant cash advance is the most common term used for such financing, but you may also see them referred to as credit card processing loans, business cash advance loans, merchant loans, or merchant advance loans. Just remember, these aren’t loans, which means they come with little federal oversight and require you, the borrower, to do your due diligence when researching your options.Traditional small business loans are different from MCAs because they provide merchants a sum of money, typically for a specific purpose, which is then repaid in regular installments. Compared to MCAs, small business loans tend to have longer repayment terms and stricter approval requirements. Where a traditional lender, like a bank or online loan provider, may look at your credit scores and require collateral, merchant cash advance companies usually do not.Small business loans come with fixed or variable interest rates, which are applied to the principal balance. Interest rates on small business loans can vary depending on the loan type and borrower, but may be lower than the factor rates you’d encounter on a merchant cash advance.While there may be fees associated with a small business loan, APRs are typically lower than those of MCAs. This means that small business loans tend to be more affordable than merchant cash advances. Examples of lending options that could be workable alternatives to MCAs include:Recommended: Cash Advance Types

4 Common Uses for a Merchant Cash Advance

One of the most common reasons a small business owner would choose a merchant cash advance is to access quick funding for short-term business expenses. A few of the common uses for MCAs include:

1. Fill Cash Flow Gaps

If a small business has fluctuating cash flow, which may prevent them from making bill payments or payroll, a merchant cash advance can act as supplementary funding until cash flow returns.

2. Emergency/Unexpected Expenses

If short-term business loans are not accessible to cover unexpected expenses, small business owners can opt for a merchant cash advance that could get them cash within a couple days.

3. Inventory

For small businesses with consistent credit and debit card sales, an MCA can be used to purchase inventory and then be repaid with a percentage of the revenue from inventory sales.

4. Seasonal Fluctuations

Some businesses have significant revenue changes depending on the season. To ensure there’s always cash on hand, small business owners can get a merchant cash advance to cover any expected losses during down time. Businesses of any size can use merchant cash advances, but they are common for businesses that are:
  • Start-ups with little to no business history
  • Those who have low or no credit, and don’t want to apply for a bad credit business loan
  • Small business owners who don’t have collateral to offer 
  • Pioneers in new industries
  • Businesses unable to qualify for loans from banks, credit unions, or online lenders

Benefits and Risks of Merchant Cash Advances

Like any source of business financing, a merchant cash advance comes with its pros and cons. Generally, MCAs are chosen as a last resort due to their high cost, but there may be times when it could be the right choice for your business. Let’s take a look at some of the pros and cons so you can make the right decision for your business.

Pros of Using MCAs

  • Quick funding: Unlike a traditional loan, you can expect to receive funds in a matter of days. 
  • Minimal paperwork: Merchant lenders offering a cash advance typically require a simple application and want to see basic financial information about your business, like a record of recent credit card transactions.
  • Unsecured: Business owners do not need to offer collateral to obtain a merchant cash advance.
  • Payments may change with sales: If the merchant cash advance is based on a percentage of sales, the repayment amount might adjust depending on the success of your business.
  • Don’t need perfect credit: If you have low credit scores, haven’t established business credit, or are struggling to get a short- or long-term business loan, a merchant cash advance can help supplement.

Cons of Using MCAs

  • Expensive: Factor rates are typically 1.1 to 1.5, depending on terms and conditions of the MCA. When you consider additional fees and APRs possibly in the triple digits, a merchant cash advance can be significantly more costly than a traditional loan.
  • No advantage to early repayment: With a merchant cash advance, you typically pay a set amount regardless of how much of the balance you’ve paid off. Merchant cash advances do not amortize like a loan, in which case you could pay less interest when you pay off the balance early. 
  • Lack of government oversight: Because MCAs are considered to be a commercial transaction, merchant cash advance companies can offer cash advances to those who otherwise may not qualify for a small business loan. However, the lack of specific government regulation can also lead to questionable financing practices and less protection for your business.
  • Don’t promote good credit: Merchant cash advance companies are not required to report to credit agencies. If you’re trying to build good business credit, using an MCA is unlikely to help the same way a loan would.
  • Hard to get out of debt: If you struggle to get loans, relying on high-APR merchant cash advances has the potential to keep you in a debt cycle that can be hard to get out of. 
  • Cash flow restriction: While using an MCA can help secure funding in the short term, it could hurt cash flow in the long term. If you agreed to give your merchant lender a high percentage of your daily credit/debit card transactions, for example, cash flow may run leaner during the MCA repayment period, especially if your sales are high. 

What If You Default on an MCA?

Defaulting on a merchant cash advance happens when you are no longer able to make your daily or weekly payments. If this happens, the MCA lender is able to file a lawsuit against you, possibly freeze both your personal and business bank accounts, or even contact your vendors to try and collect payments directly.If you think you may struggle in the future with making your MCA payments, it’s best to stay one step ahead and apply for a small business loan to pay off the MCA. You can also contact the MCA lender directly and see if you can renegotiate new terms.

Applying for a Merchant Cash Advance

Merchant cash advance companies make it fairly simple to apply for financing, which typically involves filling out an application and providing documentation:
  • Fill out an application: A merchant lender may ask for basic identification like your Social Security number, business tax ID (EIN), and contact information.
  • Collect and provide necessary documentation: This can vary depending on the MCA company, but you may need records of credit card transactions, business banking statements, lease agreements, gross revenue, and tax returns. 
  • Approval: Getting a decision can take as little as 24 hours or a few days depending on the company.
  • Set up credit card processing: Your business may be required to set up credit card processing with a specific partner of the MCA provider.
After you’ve been through the application and approval process, you’ll have funds deposited into your small business account. Payments are typically deducted automatically from this account until the entire merchant cash advance is paid off. Recommended: Merchant Cash Advance Consolidation

Alternatives to Merchant Cash Advances

Because of their lack of regulation and incredibly high APRs, merchant cash advances are usually considered as a last resort. Here’s a list of other small business lending options that may be accessible:

Invoice Factoring

Invoice factoring uses unpaid invoices as collateral in exchange for a cash advance from a lender. This is different from an MCA, which is based on projected sales. Invoice factoring also typically has a lower APR than MCAs, generally falling between 15% to 35%.

Inventory Financing

Inventory financing is an asset-based loan provided to pay for products that will be sold at some time in the future. The inventory acts as collateral for the loan.

Equipment Financing

Equipment financing is a secured loan used for the purchase of machinery, vehicles, or other business-related equipment. 

SBA Loans

SBA loans are backed by the U.S. Small Business Administration and offered by banks and other approved lenders. They typically come with competitive rates and terms, but the approval process is more lengthy than other types of small business financing options.

Personal Loans

Personal loans are typically unsecured and based on your personal credit history (not business credit) and income. Personal loans can be used for almost any purpose, including business expenses.

Commercial Real Estate Loans

Commercial real estate loans are funds used for the purchase of business-related real estate, such as an office space or retail shop.

Business Credit Cards

Similar to a business line of credit, business credit cards can be used for short-term business needs. Business credit cards use a revolving line of credit, with interest only charged on unpaid balances from previous billing cycles.

Online Small Business Loans

Some online business lenders offer similar loan options as a traditional bank, but typically have a faster approval process and may offer more options (albeit usually at higher interest rates) for people with lower credit scores.

Business Lines of Credit

Business lines of credit are a flexible, revolving form of financing that allows you to use the funds as you need them, pay them back, and use them again. Interest is only charged on the amount you borrow.

Compare Small Business Loan Rates

If you’re considering a small business loan, consider Lantern by SoFi. With Lantern’s easy online lending tool, you can receive a small business loan offer from a top lender with just a single application and no obligation to you.

Frequently Asked Questions

What is a merchant cash advance?
How much is a merchant cash advance fee?
What is the difference between an MCA and a loan?

About the Author



Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
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