Merchant Cash Advance: Is It Right for Your Business?
Janet Schaaf is a freelance writer, editor and proofreader who considers reader advocacy to be her calling. After taking a few roads less traveled, Janet completed a bachelor’s degree in English Literature from the University of Missouri-Kansas City, with English Department Honors. She has been correcting grammar and checking facts since she could string a sentence together. For the past three years, Janet has focused on making personal finance topics understandable and relatable. Loan terms and credit card agreements can look overwhelming, but understanding what you’re agreeing to is paramount in grasping the impact debt can have on your life.
Merchant cash advances (MCAs) can provide quick funds to help businesses cover short-term expenses or seasonal dips in revenue. While this type of financing typically has more lenient eligibility criteria than traditional business loans, be prepared to pay APRs in the triple digits.
In general, it’s worth exhausting other options for small business financing before turning to MCAs. Here is what you need to know about merchant cash advances and how to decide if it’s right for your business.
What is a merchant cash advance?
A merchant cash advance (MCA) is an alternative type of small business financing that allows business owners to receive cash advances in exchange for a portion of their future debit and credit card sales.
Due to its flexible nature, business cash advances can provide fast access to capital without requiring businesses to have good credit or provide any collateral. While this type of funding can help newer companies tackle unexpected expenses or deal with emergencies, MCAs tend to be a costly way to borrow more for your business.
How does a merchant cash advance work?
Since merchant cash advances (MCAs) aren’t technically loans, they follow slightly different rules than traditional lending. When you apply for an MCA, the lender will review your company’s monthly receipts to assess your business’s financial strength and dependability. While some lenders review your business credit report during the approval process, your company’s sales typically play a more significant role in determining your advance rate.
Instead of a traditional repayment schedule, MCA lenders take a predetermined percentage of your business’s daily sales until the advance is fully repaid. This percentage rate is called the “holdback rate” or “retrieval rate” and can range from 5% to 20%, depending on the lender.
There are three possible ways your MCA lender will collect their holdback rate:
- Automatic deduction: The MCA lender partners with your credit card processors to withdraw the agreed upon percentage from your daily debit and credit card sales. The higher your credit sales, the quicker you’ll repay the debt. And if your business’s revenue drops, you’ll pay a lower amount to reflect your cash flow.
- Lockbox or trust account: A separate account collects all debit and credit card sales, with the MCA company taking its portion before transferring the rest to your business bank account. This method is basically the same as above, except that money funnels through a third account.
- Direct ACH withholding: The MCA company deducts fixed payments based on your estimated monthly revenue from your business checking account. This method is more similar to a term loan, allowing you to stick to a regular repayment schedule regardless of your current sales.
MCA rates and fees
Merchant cash advance companies typically charge a factor rate instead of a traditional interest rate, which means that there’s a flat sum you pay to borrow money rather than interest that builds over time. To calculate how much you’ll pay with a factor rate, multiply the advance amount by the factor rate.
Depending on the lender and your company’s unique profile, your MCA factor rate could range from 1.10 to 1.5. Since MCAs aren’t officially categorized as loans, consumer protection laws preventing lenders from charging higher rates and fees than banks often don’t apply to them. This means MCA lenders can charge high fees, and some lenders may not clearly state the fees when you sign up.
Multiple variables help determine your factor rate, such as your company’s industry, time in business, personal and business credit scores, financial records and debit and credit card revenue. As with other types of financing, the more risky you appear, the more likely you’ll end up paying a higher rate.
In addition to the factor rate, merchant cash advance lenders may also charge other fees, such as origination fee of up to $3,000, which can significantly increase the overall cost of your financing.
How to calculate the cost of MCAs
When taking out a merchant cash advance, it’s important to understand how much it’ll cost you in the long run. While you can convert a factor rate to an interest rate, this doesn’t consider any additional fees. To understand the complete cost of borrowing an MCA, you need to calculate your APR.
Let’s say you want to borrow $100,000 with a 1.2 factor rate, a $1,000 origination fee and a maximum 120-day repayment term. Based on our calculations, you could expect to pay around 116.41% APR with a total loan payout of $121,000. As you can see, a 116.41% APR is relatively high compared to what you might get from a traditional bank loan, which can offer interest rates as low as 7%.
In the example above, the business has to pay back $120,000. Let’s assume the merchant cash advance company takes 10% of monthly credit card sales. Because sales aren’t consistent from month to month or from business to business, repaying a $120,000 MCA could vary based on your sales volume.
Here are two examples of how repaying a MCA might differ based on your revenue:
| Business A | |
|---|---|
| Total cost of the merchant cash advance: | $120,000 |
| Monthly credit card sales: | $50,000 |
| Payback amount per month: | $5,000 |
| Daily payback amount (in a 30-day month): | $166.67 |
| Time to repay full amount: | 24 months |
With monthly credit card sales of $50,000 and a 10% holdback rate, it takes Business A two years to repay the full MCA plus the factor.
| Business B | |
|---|---|
| Total borrowed with a merchant cash advance: | $120,000 |
| Monthly credit card sales: | $100,000 |
| Payback amount per month: | $10,000 |
| Daily payback amount (in a 30-day month): | $333.33 |
| Time to repay full amount: | 12 months |
With twice the monthly credit card sales volume, it takes Business B half the time to repay its MCA. However, since the total repayment amount doesn’t change over time with a factor rate, there’s no real incentive to pay off your MCA debt early.
Pros and cons
| Pros | Cons |
|---|---|
Suitable for seasonal businessesMCAs are paid back with a percentage of sales, providing more flexibility than traditional term loans with set repayment terms. This makes MCAs a good option for seasonal businesses with fluctuating cash flow since you won’t have to pay as much during slow times of the year. Accessible to businesses with poorer creditMCA lenders don’t usually require good business credit. Unlike traditional lenders, their willingness to lend is primarily based on your cash flow. Automatic paymentsMCA lenders automatically withdraw payments from your merchant or checking account, so you don’t have to worry about scheduling monthly payments. This can help busy small business owners avoid late fees. Fast fundingGetting a loan from a bank can take weeks or even months. With a MCA, however, you can often get approved and funded in as little as 24 hours. No additional collateral requiredMCAs are an advance against future sales, so they typically don’t require any other collateral. This makes them a good fit for business with few assets or assets already being used for secured business loans. | No prepayment optionsBecause payments are automatic, you typically don’t have an opportunity to make extra principal payments to pay off an MCA early. You won’t save money even if you repay the loan early since the factor rate and repayment amount are determined upfront. Confusing rates and termsBecause MCAs aren’t considered loans, MCA lenders aren’t required to adhere to the Truth in Lending Act, which requires lenders to provide clear loan cost information so that you can comparison shop. While some state-specific laws require more transparency, the lack of federal regulation means you may be on your own when deciphering loan rates and terms. Limits your authority to make business decisionsMCA contracts may also include restrictions that limit your authority to make business decisions during the contract term. For example, you might not be allowed to change your credit card processing company, change your business hours, change locations or offer customer incentives for non-credit card payments while you have an outstanding MCA. An expensive form of small business financingWhen you convert an MCA’s factor rate into an annual percentage rate, the APRs can go as high as 60% to 200%. This makes MCAs a costly form of small business financing. Can harm cash flowMCA lenders usually deduct repayment from your daily sales. If you’re already having cash flow problems, having an MCA eat into your daily revenue can worsen the problem. |
MCAs vs. small business loans
While merchant cash advances and small business loans can provide quick business financing for various expenses and projects, MCAs tend to have higher rates and fees.
For example, fixed-rate term loans typically have 5% to 35% or higher APRs. In contrast, if you convert the factor rate first, MCAs have an estimated APR range of around 40% to 100% or higher.
For those wanting to build business credit, you may be better off with a traditional business loan since MCA lenders don’t report payments to the business credit bureaus. That said, low-credit borrowers, startups and those without collateral might find it easier to qualify for an MCA if they have a decent cash flow.
Who should apply for an MCA?
Merchant cash advances can benefit a range of business types and industries. Here are a few examples of when an MCA might be a good fit for your company.
- You need a quick cash advance. MCAs can be processed and funded in as little as two to four days, with some lenders even offering same-day business funding.
- You generate a lot of debit and credit card sales. If your company processes a significant amount of debit and credit card transactions on a daily basis, you might be a strong candidate for MCA financing.
- You want access to a range of funding amounts. Depending on the lender and your qualifications, MCAs can provide as little as 50% or up to 250% of your monthly sales.
- You can’t qualify for traditional financing. Bad-credit borrowers and those without collateral typically have better luck getting approved for an MCA versus a conventional bank loan.
- You plan to spend the funds on various expenses. MCAs generally don’t restrict how you spend the funds, giving you ultimate freedom to expand and grow your business as you see fit.
4 merchant cash lenders to consider
| Lender | Max. loan amount | Term length | Min. factor rate | Min. credit score | Time in business | Min. annual revenue | |
|---|---|---|---|---|---|---|---|
 | $400,000 | 3 to 15 months | 1.11 | 500 | 6 months | $180,000 | Get MCA loan offers |
 | $1,500,000 | Varies based on sales volume | 1.10 | 500 | 6 months | $180,000 | Get MCA loan offers |
 | $400,000 | 3 to 15 months | 1.10 | 525 | 6 months | $60,000 | Get MCA loan offers |
 | $3,000,000 | 12 month average repayment | 1.20 | 500 | 6 months | $120,000 | Get MCA loan offers |
How to get a merchant cash advance
If a merchant cash advance seems like a suitable funding option for your business, here are the steps to take to get funded.
1. Review the merchant cash advance requirements
Some MCA lenders have strict business loan requirements, while others weigh your monthly sales more heavily than your credit profile.
To increase your chances of approval and secure the most competitive MCA rates, you should aim to meet the following criteria:
- Credit score: 500 or higher
- Time in business: At least six months
- Annual revenue: $60,000 or more
You can check and monitor your personal credit score for free with LendingTree Spring to see where you stand.
2. Compare lenders
Some MCA lenders prey on new businesses or use sketchy practices, locking you in a brutal debt cycle. Because of this, it’s crucial to research your options and read online lender reviews before proceeding.
A reputable MCA company should be transparent about all their rates, terms, fees and conditions.
3. Gather necessary documents
Your MCA lender will likely require essential business documents during the underwriting process. Gathering this paperwork can help speed things along to get your money faster.
Here are some common documents you might need to provide:
- Recent business tax returns
- Financial statements
- Recent credit card processing statements
- Employer Identification Number (EIN)
- Business history
- Business credit report
- Personal credit report
4. Apply and get funded
You can apply for a merchant cash advance online with an alternative business lender. Most MCA lenders utilize the latest underwriting software to analyze your data and make a funding decision in as little as 10 minutes.
Be sure to read the fine print in your business loan agreement before signing on the dotted line — lenders can try to sneak in a few extra fees at the last minute. Crunch the numbers to ensure your business budget can handle the interest charges.
If it all looks good, you can move ahead and receive your funds within a few days.
Alternatives to MCAs
While a cash advance for business can provide speedy funds with flexible requirements, it can be an expensive way to access capital for your company. If you have time to boost your credit score and strengthen your business’s overall profile, you might be eligible for other types of small business loans.
Short-term business loans
Short-term business loans typically provide between $2,000 to $1.5 million, with scheduled repayments ranging from three to 24 months. While eligibility for MCAs is primarily based on your debit and credit card sales, you generally need good credit and a six- to 24-month business history to qualify for short-term business loans.
One advantage of going with a term loan over an MCA is that most lenders report to the credit bureaus, helping you establish and build your business credit.
Line of credit
Similar to a credit card, a business line of credit allows you to borrow up to a set limit as often as needed. Credit limits can range from $1,000 to $250,000 or more. You typically only pay interest on the withdrawn amounts, although some lenders charge maintenance or draw fees.
A business line of credit could be an affordable option for your company if you anticipate needing occasional access to funding or need extra funds to cover seasonal dips in revenue.
Working capital loans
A working capital loan can cover a range of business expenses like payroll, inventory, marketing campaigns and more. Loan amounts typically range from $5,000 to $1.5 million, with repayment terms between six and 84 months.
Your business could benefit from a working capital loan if you want fast, flexible funding with competitive interest rates and flexible repayment terms.
Equipment financing
If you need to upgrade or acquire essential equipment for your company, equipment financing could provide up to $5 million in funds with repayment terms typically ranging from four to 120 months. Since the equipment you’re purchasing acts as collateral to secure the debt, equipment finance companies are generally more willing to work with low-credit borrowers, startups or those with limited revenue.
You can likely access lower interest rates and longer repayment terms with equipment financing than MCAs, helping your company save more in the long run.
Business credit cards
Businesses needing flexible funds could consider a business credit card to cover low-cost everyday expenses. You can also get a business travel credit card to rack up points for flights, rental cars, cashback bonuses and more. While credit card APRs tend to be lower than MCAs, you’ll likely pay higher rates than going with a traditional business loan. Because of this, it’s a good idea to use credit cards in moderation and pay off your bills in full every month.
Business credit cards are typically easier to qualify for than small business loans, helping your company access the cash you need when you need it.
Frequently asked questions
Possibly, but it depends on the lender and how low your credit score is. Merchant cash advance lenders are usually more concerned with cash flow and volume of credit and debit card transactions than credit scores. Because of this, a merchant cash advance loan can be a good option for those looking for business financing with bad credit. Just be aware that you’ll likely pay a higher rate than you would with traditional or credit union business loans.
New businesses with a solid cash flow can consider an MCA as a form of startup financing. However, startups with no money may have to explore other options, such as small business grants or crowdfunding to get the funds they need to launch their entrepreneurial ideas.
If you default on a merchant cash advance, the lender can sue the business for the money you owe. Some MCA companies also require a personal guarantee, which means they can hold you personally responsible for repaying the advance if the business cannot repay the debt.