Key takeaways
- Merchant cash advances are one of the most expensive types of business financing.
- MCAs are not federally regulated, which can result in misleading marketing and confusing contracts from MCA companies.
- MCAs are usually fast and easy to qualify for, making them a viable option for business owners who can't qualify for other types of funding.
Merchant cash advances (MCAs) are best-suited for small businesses that need money quickly to cover cash-flow gaps or short-term expenses.
However, because MCAs are one of the most expensive financing options out there, you should consider other types of small-business loans before a merchant cash advance.
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What is a merchant cash advance?
A merchant cash advance is an alternative type of business financing where 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.
Here’s what you might expect from an MCA:
| Funding speed | Fast. Many companies can fund the same day you apply. |
| Cost | Expensive. Effective APRs may range from 40% to 350%. |
| Term length | Short. Many advances are repaid within three to 18 months. The higher your sales, the faster you’ll repay the advance. |
| Repayment frequency | Daily or weekly. |
| Qualification requirements | Fairly easy. New businesses and owners with poor credit may qualify, but you’ll likely need at least $10,000 in monthly sales. |
When an MCA might make sense
An MCA may be worth considering if all of the following are true:
- You need money fast.
- You can’t qualify for other types of business loans.
- You have consistently high sales.
- You’re confident your cash flow can handle daily or weekly repayments.
If that sounds like you, an MCA may make sense. Just make sure you compare offers from multiple companies and know the full costs involved before accepting one.
Otherwise, you may want to check out these alternative options that may fund quickly or have flexible requirements:
- Business line of credit. Having one already open allows you to quickly tap into working capital when you need it.
- Online term loan. This gives you a lump sum of cash with a more predictable repayment schedule.
- Equipment financing. This can help you quickly buy or replace business equipment.
- Invoice factoring or invoice financing. This is a fast funding option for B2B companies with unpaid invoices.
- SBA microloan. This may be a good option if you need $50,000 or less, can wait a few weeks for funding and have a credit score of 620 or higher.
🤓 Nerdy Tip
If you’re having trouble qualifying for a traditional business loan, adding a co-signer may help. Lenders may be more likely to approve your loan application if the co-signer has strong credit and personal assets. If you add a co-signer on a business loan, they’re responsible for making payments if you don’t. How does a merchant cash advance work?
- You apply for a merchant cash advance directly with an MCA provider or through a business lending marketplace. You’ll likely have to provide basic business information and recent sales data.
- The MCA company reviews your application. If approved, they’ll send funds to your business bank account — sometimes as soon as the same day.
- You repay the advance daily or weekly using a percentage of card sales or fixed withdrawals from your bank account (more on that below).
- Repayments happen automatically until you’ve repaid the full agreed-upon amount, which includes the original advance plus fees.
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. 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. The MCA company may deduct these payments from your bank account — or, they can deduct them directly from your payment processing account.
The predetermined percentage of your sales is called the “holdback rate” or “retrieval rate” and typically ranges from 5% to 20%. The exact rate will vary depending on your lender, the advance amount and your sales volume.
Unlike other types of business loans, merchant cash advances don’t have typical repayment terms. Repayment periods are based on your sales and 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
Merchant cash advance companies can also withdraw a fixed amount directly from your business bank account — similar to the way a conventional business loan works. 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. It 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.
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. Businesses that look riskier will likely receive higher factor rates — and pay higher fees as a result.
You may also be charged additional fees, such as administrative fees or underwriting fees, which will increase the total cost of the cash advance
Calculate the cost of a merchant cash advance
To calculate the cost of a merchant cash advance, multiply the amount received by the factor rate. For example, if you are approved for an advance of $50,000 at a factor rate of 1.4, your total repayment amount will be $70,000, which means you’ll be paying $20,000 in fees.
🤓 Nerdy Tip
To understand the total borrowing cost of a merchant cash advance, convert the factor rate and additional fees into an APR using a calculator like NerdWallet’s merchant cash advance calculator. This will also help you determine how long it will take to repay the advance in full. Let's break down what this MCA looks like if the provider deducted a 10% holdback rate (i.e. 10% of your monthly credit card sales) until you repaid the full $70,000 based on different revenue amounts:
| MCA details:
| ||
| Monthly credit card sales | $100,000 | $70,000 |
| Daily payment | $333 | $233 |
| Repayment term | 7 months | 10 months |
| Total repaid | $70,000 | $70,000 |
| Estimated APR | 125% | 87.30% |
In this example, paying off the debt faster actually leads to a higher APR. If your sales are lower, your APR decreases — but it takes longer to pay off the debt. In either instance, you’ll still pay the same in fees.
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 facing credit challenges, startups and those with previous financial difficulties. Plus, MCAs don’t typically require physical collateral. Providers will likely focus on your debit and credit card transactions or business revenue. Of course, the better your qualifications, the better factor rate you can receive.
✅ Collateral not required. Because an MCA is an advance based on your future sales, you don’t usually need to provide physical collateral to secure your financing. Plus, some MCA providers don’t require a personal guarantee.
Cons
❌ Expensive. Compared with other types of business loans, like online term loans or business lines of credit, whose APRs typically range from 14% to 99%, MCAs are one of the most expensive forms of financing. APRs 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 in a cycle of debt that’s hard to break.
❌ Minimal benefit to repaying early. Since you have to repay a fixed amount of fees, you can’t save on interest by repaying early, unlike traditional loans. However, some MCA companies offer a discount for repaying an advance early.
❌ 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.
❌ No federal regulation. Unlike traditional loans, merchant cash advances, which are structured as commercial transactions, are not subject to federal regulation. This lack of oversight has often led businesses to fall victim to predatory companies that use misleading marketing and sales tactics, promising instant approvals and funding.
What happens if you default on a merchant cash advance?
Generally speaking, defaulting on a business loan means that you have stopped making payments on it, and a lender can take recourse specific to your type of debt and loan agreement. Because MCA companies are not subject to federal regulations, defaulting on a merchant cash advance can often be more detrimental than defaulting on a traditional loan.
Many MCA companies require you to sign a confession of judgment at closing, an agreement that essentially waives your right to dispute or defend yourself in court if they decide to file a judgment against you.
If you are in danger of defaulting on an MCA, you may be able to restructure your agreement with the company or put payments on temporary hold if you reach out to your MCA company directly. Another option is to try refinancing your MCA with a traditional loan. This will also likely save your business money in the long run.
» MORE: How to refinance a business loan
