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Is a Merchant Cash Advance Right for Your Business?

An MCA is an advance of capital repaid using future credit card sales. Business owners should consider other types of financing before relying on this expensive option.
Last updated on April 13, 2022

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A merchant cash advance, also called an MCA, provides alternative financing to a traditional small-business loan. With an MCA, a company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.
A merchant cash advance isn't technically a loan. Instead, an MCA provider is purchasing your future sales at a discount.
This type of financing is designed for small businesses that need capital immediately and can be used to manage cash-flow shortages as well as cover a variety of short-term expenses.
Although merchant cash advances are often easy to qualify for, they can also carry annual percentage rates in the triple digits and can create a cycle of debt that’s difficult to break. Generally, you should consider all other small-business loan options before turning to an MCA.
Here’s what you need to know about merchant cash advances, how they work and what to keep in mind before choosing one for your business.

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How merchant cash advances work

A merchant cash advance company approves your business for a specific amount of funding and provides you with a lump sum of capital upfront. You repay the money you receive, with fees, using a percentage of your future sales.
Merchant cash advance repayments can be structured in two ways:

Percentage of debit/credit card sales

This is the traditional way an MCA is structured, in which a merchant cash advance provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance is repaid in full.
Unlike other types of business loans, merchant cash advances don’t have typical repayment terms, as your repayment period is based on your sales. Repayment terms can range anywhere from three to 18 months; the higher your credit card sales, the faster you’ll repay the advance.

Fixed withdrawals from a bank account

Instead of deducting repayments from your debit and credit card sales, merchant cash advance companies can also withdraw funds directly from your business bank account. In this case, fixed repayments are made daily or weekly from your account regardless of how much you earn in sales, and the fixed repayment amount is determined based on an estimate of your monthly revenue.
This type of MCA repayment structure allows you to calculate exactly how long it will take to pay the advance back based on the amount borrowed and can be better suited for businesses that don’t rely heavily on debit and credit cards sales.

Merchant cash advance rates and fees

Instead of a traditional interest rate, merchant cash advance companies charge their fees as a factor rate. Factor rates typically range from 1.1 to 1.5, varying based on the provider’s assessment of your business.
Your industry, years in operation, business financials, debit and credit card transactions and personal credit score may all play a role in determining the factor rate you receive. In this way, how much you’ll pay in fees is determined by your ability to repay the merchant cash advance. The higher the factor rate you receive, the higher fees you’ll pay.
To calculate your total repayment amount, you multiply the cash advance by the factor rate. For example, if you are approved for an advance of $35,000 and receive a factor rate of 1.3, your total repayment amount will be $45,500, which means you’ll be paying $10,500 in fees.
Total advance
Factoring rate
Total repayment
Total fees
$35,000
1.3
$45,500
$10,500
The factor rate also does not include any additional fees the merchant cash advance company may charge you for working with it, such as administrative fees or underwriting fees, which will increase the total cost of your financing.

Calculate the cost of a merchant cash advance

Although a factor rate of 1.1 or 1.4 may seem reasonable, it can be helpful to break down an example of what MCA repayment looks like and what this type of financing will actually cost.
For instance, let’s say you need $50,000 to purchase a new oven for your restaurant. You apply and get approved for the full advance amount and receive a factor rate of 1.4, so you’ll owe a total amount of $70,000.
The merchant cash advance provider is going to deduct 10% of your monthly credit card sales until you’ve repaid the $70,000 and your restaurant averages $100,000 in credit card revenue per month. You would repay $10,000 monthly, with daily payments of $333 in a 30-day month.
At this pace, you’d pay off the advance by the seventh month. But, if your revenue dropped to $70,000 per month, you’d only be paying $7,000 monthly with daily payments of $233 and wouldn’t repay the MCA in full until the 10th month.
In this example, it may seem more advantageous to pay off the debt faster, with better sales, in seven months, but if you do, the APR on your advance is 125%. If your sales are lower, at $70,000, your APR decreases to 87.3%, even though it takes longer to pay off the debt. In either instance, you’ll still pay the same total amount in fees. However, the different APRs show how expensive a merchant cash advance can be, especially compared with other types of financing.
To understand the total borrowing cost of a merchant cash advance, you should always calculate the factor rate and additional fees into an APR. This will also help you determine how long it will take to repay the advance in full.
Use our MCA calculator below to compare the cost of a merchant cash advance with that of other business loans.

Pros and cons of merchant cash advances

Pros

  • Fast to fund. You can apply for a merchant cash advance online — and get approved quickly — usually with minimal documentation required. Many MCA providers offer funding within 24 hours.
  • Flexible requirements. Merchant cash advance companies may work with businesses with bad credit, startups, as well as those with previous financial difficulties. Plus, MCAs don’t typically require physical collateral to back up your financing. Providers will likely consider traditional requirements but may focus on your debit and credit card transactions or business revenue. Of course, the better your qualifications, the better factor rate you can receive.
  • Repayment based on your sales. Unlike other types of business financing, your repayment schedule is based on a fixed percentage of your sales, so payments adjust based on how well your business is performing.

Cons

  • Expensive. Compared with other types of business loans, like online term loans or business lines of credit, whose APRs typically range from 9% to 99%, MCAs are one of the most expensive forms of financing. APRs on merchant cash advances can reach 350%, depending on factors such as the lender, size of the advance, fees, time it takes to repay and business revenue. Plus, unlike traditional interest rates, factor rates can make it more difficult to determine exactly how much an MCA will cost you.
  • Frequent repayment and debt cycle danger. Merchant cash advances are repaid daily (sometimes weekly) and payments are deducted directly from your incoming sales, which can seriously impact your cash flow. The high cost, coupled with frequent repayments, can easily trap you into a cycle of debt that’s hard to break out of, especially if you need another advance after taking one on and you can’t qualify for other financing options.
  • No benefit to repaying early. Since you have to repay a fixed amount of fees no matter what, you can’t save on interest by repaying early, unlike traditional amortizing loans.
  • Confusing contracts. Merchant cash advance contracts can be confusing, especially considering the nature of factor rates and repayment schedules that are based on percentages of your daily sales. MCA providers also don’t typically provide APRs in their agreements, which makes it difficult to compare these products with other types of financing. Although some states have moved to force transparency among MCA companies in recent years, providers have historically been criticized for agreements that are unclear and hard to understand.
  • No federal regulation. Unlike traditional loans, merchant cash advances, which are structured as commercial transactions, are not subject to federal regulation. Instead, MCAs are regulated by the Uniform Commercial Code in each state. This limited regulation has often led businesses to fall victim to predatory companies that use misleading marketing and sales tactics, offering instant approvals and funding.

Merchant cash advance companies

If you determine that a merchant cash advance is the right financing option for your business, you’ll want to thoroughly vet any MCA provider before deciding to work with them. And, before you sign any agreement, you should make sure you understand all of the terms and conditions, fees and repayment information.
Consider starting your search with these companies:

Credibly

Credibly is a merchant cash advance provider that offers financing up to $400,000. You can apply for an advance online with a simple application and receive approval in as little as four hours. Once you’ve been approved, Credibly can transfer the funds into your business bank account in as fast as 48 hours.
Credibly deducts a percentage of your daily credit and debit card sales for repayment, and factor rates start as low as 1.09. To qualify, you need a personal credit score of 500 or higher, at least six months in business and $15,000 or more in average monthly business bank deposits.

Reliant Funding

Reliant Funding offers merchant cash advances up to $400,000. With Reliant, you complete a simple request and receive a personal account manager to help you through the funding process. You can get approved in just hours and receive funds within 24 hours.
Reliant collects daily or weekly repayments but does not specify factor rates on its website. You’ll have to work with an account manager to receive a rate based on an evaluation of your business.
To qualify for an MCA with Reliant, you’ll need at least six months in business, $60,000 or more in annual revenue and a personal credit score of 525 or higher.

Alternatives to MCAs

Generally, before turning to a merchant cash advance, you should seek out alternative financing options. If you’re a new business, have bad credit or need funding quickly, some online lenders may still offer small-business loans that are worth considering.
For example, OnDeck offers online term loans for businesses with at least one year in business, a minimum credit score of 600 and at least $100,000 in annual revenue. These loans are available in amounts up to $250,000 with terms up to 24 months. Repayment can be daily or weekly and APRs range from 9% to 99%.
Startup businesses, on the other hand, might look into Fundbox, which offers business lines of credit up to $150,000. To qualify, you’ll need a minimum credit score of 600, at least six months in business and at least $100,000 in annual revenue. Fundbox lines of credit require weekly repayments and have terms of 12 or 24 weeks. APRs range from 10.1% to 79.8%.
With both of these lenders, you can apply for financing online and receive funds as soon as the next business day. And, although the qualification requirements may be higher than some MCA providers, the cost of borrowing will likely be much lower.

Find and compare small-business loans

For additional financing options, check out NerdWallet’s list of the best small-business loans for business owners.
Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.

Does your business need funding? Find your best loan options with Fundera by NerdWallet.