Business Loans
How Does LendingTree Get Paid?

How Does LendingTree Get Paid?

LendingTree is compensated by companies on this site and this compensation may impact how and where offers appears on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

How Does a Merchant Cash Advance Work?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.

A merchant cash advance is a type of financing that allows businesses to receive a lump sum advance in exchange for a portion of future earnings, typically credit card sales.

An MCA isn’t ideal for every situation, but a business cash advance could work for entrepreneurs who need quick access to funds they can use to purchase inventory, make payroll obligations or cover other business-related expenses.

What is a merchant cash advance?

A merchant cash advance is an alternative to a traditional small business loan. Instead of interest, MCAs charge fees known as factor rates, which we’ll discuss more, below. Another difference is the fact that the provider normally gets paid back from your credit card sales, generally on a daily basis versus the fixed monthly payment of a traditional loan.

The advantage is the availability of funding for business owners who may not qualify for traditional financing, but fast repayment terms and potentially high fees are downsides to keep in mind.

How MCA loans work

In a traditional merchant cash advance, the MCA provider gives you an upfront sum of money in return for a daily or weekly percentage of your credit card sale. Debits continue until the advance plus fees are remitted in full.

ACH advance. You can also execute MCA loans using ACH advances, where businesses receive an upfront sum and remittances are deducted from their checking account. With this type of merchant cash advance, daily or weekly sums are transferred from the checking account through an automatic clearing house (ACH) withdrawal until the advances and fees are remitted in full.


Imagine a retailer who is preparing for an upcoming holiday shopping season that accounts for the bulk of your annual sales. They are short on cash, but they need to hire additional workers and beef up inventory.

They could take out a small business loan, but they don’t necessarily want to commit to a loan, since the need for financing is only temporary. The retailer takes out a $28,000 merchant cash advance to pay for increased worker hours during the busy holiday season:

  • Advance offer: $28,000
  • Factor rate: 1.45
  • Origination fee (2%): $560
  • Daily payment: $338.33 for 120 days (Monday through Friday)
  • Payback amount: $40,600

With this example, this business owner is paying over $12,000 in fees over the course of 120 business days. That’s a high price to pay for a cash advance, yet this business also had the benefit of accessing this additional funding without having to take out a traditional loan and make payments over a longer period of time.

Merchant cash advance terms and features

MCA loans vary between merchant cash advance companies, but here’s a look at typical terms and features.

Maximum amount $250,000 to $500,000
Factor rate 1.10 to 1.50
Deduction percentage 5% to 20%
Payment period 3 to 12 months
Payment frequency Daily or weekly


Different providers offer different arrangements. For example, we’ve seen payment periods up to 24 months with monthly payments.

Pros and cons of a merchant cash advance


  • Businesses don’t need perfect credit. According to business funding expert Tim Allec, MCA loans can be obtained with little documentation because they are more cash flow-based and less creditworthiness-based.
  • Good for seasonal businesses. Because remittances are based on future receivables, they may be a good fit for seasonal businesses or those with fluctuating revenue.
  • Flexibility. Where traditional small business loans require a fixed payment each month, regardless of income, MCA loans are typically based on credit card sales. When credit card sales are high, you would pay more, and less on days when sales are slow. But this has a downside, too, as you’ll see in a minute.


  • MCAs can be expensive. Daily or weekly payments may hinder your company’s ability to perform. At the end of the day, this type of funding is one of the most expensive types of business financing.
  • You’re financially penalized for having high sales. Because MCA loans are repaid based on a percentage of your sales, periods of high sales means you’re paying the MCA provider more, too. The equivalent APR of making daily or monthly payments can skyrocket into the triple digits.
  • Confusing rates and terms. In addition to the less familiar factor rates, according to attorney Leslie Tayne, MCA companies also might not be upfront about other fees they’re charging, taking advantage of business owners desperate for cash.
  • Business owners may become trapped in a cycle of debt. “You borrowed because you needed cash quickly, hoping that … more sales would come in,” Tayne said. If sales don’t materialize, you may be forced to take out an additional MCA to repay the first.

Alternatives to a merchant cash advance

Small business owners who need access to cash but hope to find more affordable borrowing options should consider all the alternatives to MCA loans. Here are some additional borrowing options to consider that might work well depending on your situation:

For business owners with poor credit

  • Business line of credit: A business line of credit is money you can borrow as you need it, versus the lump sum of either an MCA or small business loan. While you may be able to get approved for a business line of credit if you have a low personal credit score, you can expect to pay a higher interest rate.
  • Secured business credit card: If you have poor credit and can’t get approved for a traditional business credit card, a secured credit card for business can provide you with a line of credit to borrow against. Just remember that, like all secured lines of credit, secured business credit cards require you to put down collateral.

For businesses in a cash crunch

  • Business credit card: Traditional business credit cards can be used to pay for supplies and equipment, as well as covering business-related purchases you can pay for with plastic. Many business credit cards also offer consumer protections and various perks while letting business owners earn rewards based on their spending.
  • Small business loans: Small business loans can be tailored to meet your unique borrowing needs and goals. Short-term and long-term small business loans are available, as well as business loans backed by the Small Business Administration. A short-term loan could offer the fast funding you’re seeking in an MCA with potentially lower rates.

For businesses that need equipment

  • Small business equipment financing: Business owners can also apply for small business equipment financing, which allows the equipment itself to act as collateral for the loan. You do need good credit to qualify for this type of financing, but this type of loan tends to come with low interest rates.

FAQs about merchant cash advances

If you’re on the fence about taking out a merchant cash advance, you should make sure you understand the terms and conditions inside and out. These frequently asked questions and answers can help you gain greater insight into how MCA loans work as well as merchant cash advance regulation.

Are merchant cash advances regulated differently than small business loans?

Merchant cash advance regulation works differently, since this type of funding isn’t considered a loan. Because merchant cash advances aren’t loans, they don’t have to follow existing regulations that govern maximum interest rates. That’s the main reason MCA providers are able to charge significantly more in fees when compared to a small business loan.

Is an MCA right for my business?

A merchant cash advance could be right for your business if you need easy and fast access to cash in order to keep your business afloat, or if you’re facing an especially busy season and need only short-term access to funding. It’s typically best for those that have high credit card sales — providers will typically want to see a certain amount of sales in addition to at least several months in business.

Are merchant cash advances legal?

Merchant cash advances are legal, although they’re not right for every business or every situation.

How can I get out of a merchant cash advance?

To get out of a merchant cash advance, you’d need to repay the amount of money that was forwarded to you, including applicable fees charged by the merchant cash advance company.

Should I get a business credit card instead?

If you have upcoming expenses you could cover with plastic, such as inventory or supplies, then a business credit card could be a better option. Not only are business credit cards easy to qualify for, but they only require you to repay amounts you borrow. Note, however, that business credit cards tend to come with higher APRs than traditional small business loans from a bank.

How quickly can I receive a merchant cash advance for my business?

The speed at which you’ll receive business cash advance funding depends on the company you work with and other factors. However, some merchant cash advance providers say you can receive your funding in as little as 24 hours.

How can I use the funds from my merchant cash advance?

Because merchant cash advances are not a loan, there is no limit to how you can use the money. However, common business uses include payroll, the cost of hiring new employees, inventory, equipment, marketing and more.

How do I apply for a merchant cash advance?

Many merchant cash advance companies make it easy to apply for your funding needs online. However, you may also find MCA companies with brick and mortar locations in your area.

What kind of documentation do I need to apply?

To apply for a merchant cash advance, you’ll need to provide documentation such as a form of identification, a voided business check, bank statements, a copy of your business tax return and credit card processing statements.


Compare Business Loan Offers

Featured Articles