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Published April 11, 2023
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What Is a Merchant Cash Advance?

A merchant cash advance provides businesses with a cash payment based on future credit and debit card sales.

A merchant cash advance is a way for businesses to borrow against their future credit and debit card sales. The merchant cash advance provider is repaid via a percentage of the business’s future sales, as well as a fee.

Merchant cash advances can be costly and potentially risky. It’s important to be aware of the terms and conditions, including how repayments work, before deciding whether this is the right option for your business.

How does a merchant cash advance work?

A merchant cash advance is different from a traditional business loan. Rather than borrowing a bank or credit union’s money, a business is advanced money it anticipates making in the future. The cash advance provider makes a profit by charging a fee for this service.

Companies providing merchant cash advances charge a fixed amount to be withheld from future transactions, called a holdback amount. The holdback amount is set as a percentage — with a holdback of 15%, for example, the lender will take 15 cents per dollar on the borrower’s credit and debit transactions.

The borrower agrees to repay the advanced amount over time, directly out of their credit and debit card sales on a daily or weekly basis until the full amount is repaid. The payments accelerate or slow down, based on sales volume, and there is generally  no penalty for paying the cash advance off early.

The total amount the business agrees to repay includes fees and will be higher than the holdback rate. This is referred to as a factor rate.

For example, if a business borrows $10,000 and agrees to repay $15,000, the factor rate is 1.5. If the provider requires a holdback of 18% of estimated monthly credit card sales, it will take the business 250 days to repay the advance with a daily payment of $60. The APR of the cash advance in this example is 127%, which is quite high.

Merchant cash advance eligibility requirements

Among other things, providers will look at the borrower’s credit and debit transaction history to ensure they have sufficient transactions per month to cover the cash advance. In some cases, at least six months of processing history may also be required. 

If the borrower meets these criteria, the provider will agree on an amount to advance to the business, as well as total repayment amount, and the rate the lender will hold back from future card transactions to collect its fee.

How much money can you get with a merchant cash advance?

A small business could borrow thousands of dollars through a merchant cash advance, depending on the volume of its card transactions. 

Many providers limit merchant cash advances to one or two times the amount of a borrower’s credit and debit card payments per month.

Pros and cons of merchant cash advances

A merchant cash advance may be a way for a business with a reliable volume of daily card transactions to access extra capital. But it is also important to take note of the downsides and risks of this type of financing.


  • No collateral required: Merchant cash advances are based on future card transactions rather than collateral such as inventory, so they can often be accessed more quickly and easily than traditional loans.
  • Automatic repayment process: Repayment of merchant cash advances happens automatically as the business makes sales, so borrowers don’t have to remember to make payments on time. Repayment amounts based on sales volume may also help those who have seasonal downturns stay on top of their cash advance repayment obligations.


  • High interest rates: Merchant cash advances are considered a high-cost form of credit. While the provider may only charge a few cents on each dollar borrowed, in some cases, the total cost of these advances can be up to 50% higher than the original amount advanced.
  • Lower cash flow: A merchant cash advance is repaid using a portion of a business’ credit and debit card sales over a period of time — so, while the advance is still outstanding, there will be less cash flow.

Merchant cash advance alternatives

Before using a merchant cash advance, businesses should compare the merits and drawbacks of other options, such as:   

Loans: A business loan may provide a lower-interest alternative to a merchant cash advance. Small business loans require a more rigorous approval process than a merchant cash advance and may take longer to approve, but often provide similar loan amounts at interest rates of less than 8%.

Credit cards: Business credit cards may also offer a solution for temporary cash flow needs. In many cases, credit limits are similar to those of merchant cash advances, but with interest rates around 20%. Some may also earn additional rewards, such as cash back.

Frequently asked questions about merchant cash advances

Are merchant cash advances a good idea?

It depends. For businesses that need quick access to a cash infusion and have the credit card sales volume to pay off the advance quickly, this may provide a short-term solution. However, if your card sales slow, you will be paying the advance off for a longer period of time. In either case, the interest rate on a merchant cash advance is higher than those offered by traditional loans.

What happens if you default on merchant cash advance?

Failing to meet the obligations of a merchant cash advance means you’re defaulting on your contract with the provider; you could pay steep penalties and face potential legal consequences.


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