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What Is a Merchant Cash Advance?

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A merchant cash advance is an alternative financing option for small business owners, particularly those that don’t have a good enough credit history or haven’t been in business long enough to qualify for traditional business financing.

But while a merchant cash advance may have an easy approval process, the cost might not be worth it. Here’s what to know about how to define merchant cash advance options and whether to get one for your business.

What Is a Merchant Cash Advance?

With a merchant cash advance, MCA for short, business owners receive a loan upfront in the form of an advance on future credit card sales. Unlike a traditional small business loan, borrowers won’t make equal monthly payments.

Instead, the merchant cash advance provider receives a percentage of your sales as repayment. Your payments to the lender are typically paid automatically daily based on credit card payment receipts.

The total amount you pay, including principal and interest, is determined by a factor rate. The lender determines this rate based on your business’s creditworthiness and financial track record.

Merchant Cash Advance Example

If you’re wondering how merchant cash advances work, here’s an example to help. Let’s say that you’re running low on inventory, but you don’t have the cash to purchase new items to sell to customers.

You decide to get a merchant cash advance. Merchant cash advance companies will look at your company’s credit history, financial history, and current sales when you apply.

  • Advance amount: $10,000
  • Factor rate: 1.5
  • Total repayment amount: $15,000
  • Daily deduction/holdback: 10% of sales
  • Estimated term: 9 months

You’d need to generate at least $556 in daily credit card sales to pay off the balance within nine months. The MCA provider takes 10% of that as a “holdback,” or roughly $55.60.

Of course, you’re unlikely to have the same sales numbers every day, and that figure can include weekends and holidays, which may or may not be business days for you. But if you have strong sales already and don’t anticipate running into any problems, you’ll be able to pay off the debt by the estimated term date or sooner.

How to Qualify for a Merchant Cash Advance

As you research merchant cash advance information, eligibility requirements are likely a top priority. The good news is that qualifying for an MCA is relatively easy. Your ability to repay is based on your receivables, not your track record with other debts or your credit score. So, you may qualify for this financing even if your business is relatively new or you have bad credit.

The key is having a good sales record, which will reasonably continue as you pay back what you owe.

Unfortunately, it’s difficult to nail down exact sales requirements because each MCA provider is different in how it considers various criteria.

But if you primarily collect payments from customers or clients via debit or credit card transactions (or even checks) and have a high sales volume, you could have a good chance of getting approved.

The Pros and Cons of Merchant Cash Advances

There are some clear benefits to using an MCA to obtain the capital your business needs. But some major pitfalls could make it not worth the trouble.


Quick business funding

Many traditional business financing options can take several weeks or months to close. However, with an MCA, the application process is quick, and you can usually get funding in the form of a lump sum within a few days or even sooner.

Flexible repayment terms

You don’t have to worry about a fixed monthly payment like you would with an installment loan or a revolving line of credit. Instead, your monthly payments will be based on your actual sales.

Flexible use

You can generally use MCA funds for just about anything you want. For example, you can use it to pay off another debt you can’t afford to repay based on the monthly payment. Or you could use it to cover unplanned but temporary expenses, working capital needs, buying inventory or supplies, or just about anything else.

No collateral requirement

Many small business loans and lines of credit require you to put up collateral to secure the financing. If you fail to repay, the creditor can repossess the collateral. Fortunately, you don’t have to worry about that with an MCA.


Very expensive

Merchant cash advances charge annual percentage rates (APRs) that can climb into the triple digits. It can be challenging to know your APR because repayment is based on a factor rate instead of an interest rate. It’s important to use a merchant cash advance calculator and run the numbers to determine how much it will cost.

It doesn’t help build credit

If you’re considering using an MCA to help establish your credit score, you’ll likely end up disappointed. A merchant cash advance isn’t technically a loan — it’s an advance on future sales — so providers typically don’t report your payments to the commercial credit bureaus. Consider a small business credit card or a business credit builder loan if you’re considering ways to build credit when starting out or have poor credit.

Can impact your cash flow

Because you have to make daily payments, typically from your bank account, an MCA will negatively impact your cash flow. This could have future ramifications for your business.

No benefit for paying early

Your merchant cash advance factor rate is locked in regardless of how long it takes you to repay the debt. This is in stark contrast to a traditional bank loan, where the interest is amortized over the loan repayment period, and you can save by paying back early. The same goes for credit cards, which only charge you interest if you carry a balance.

Risk of default

It’s common to default if you’re having difficulties meeting the payment schedule. This could result in a lawsuit with an MCA lender. You could also have a UCC lien placed against your business.

Is a Merchant Cash Advance Right for You?

There are situations where it might be worth considering an MCA for your business. However, some drawbacks, particularly the costs, should be major concerns. Depending on your current financial situation and your needs, there are often plenty of other small business financing options that you can obtain to get the capital you need. Some of those options include:

  • Small business credit cards: Credit cards can be great for working capital needs. Many offer sign-up bonuses, ongoing rewards, and other perks to provide value on everyday business expenses. You don’t even need collateral or any time in business to qualify, though your eligibility is almost always based on your personal credit score.
  • Business line of credit: While some lenders require you to be in business for at least a couple of years for a line of credit, some online and alternative lenders offer them for newer businesses. You may still need to have at least six months to a year in business and strong revenue numbers, but you’ll get more affordable financing if you qualify.
  • Short-term loan: Some online and alternative lenders will offer short-term business loans that need to be repaid within a year. These will be more expensive than traditional business term loans, but they’re often much cheaper than merchant cash advances.

As you think about what you need for your business, review all your options before settling on an expensive one like merchant cash advances. If you decide to proceed with an MCA, make sure you’re in a good enough position to pay off the debt without further hurting your business.

Remember that you can get a free consultation with Tayne Law Group, where we have decades of experience dealing with debt and debt collectors. Call (866) 890-7337 or fill out our short contact form to get started.

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