Is a Merchant Cash Advance a Loan?

is a merchant cash advance a loan

Although both merchant cash advances and traditional business loans involve receiving and repaying a sum of money, they are not the same thing. 

How Does a Business Loan Work?

Business loans are a form of financing for qualified businesses. They’re provided by banks, credit unions, and other approved lenders. Companies use business loans to pay for a number of expenses related to running a business, such as purchasing new equipment, payroll, supplies or buying commercial property.

Typically, business loans come with fixed monthly payments. The repayment term is usually around five years or more. In the case of loans provided by the Small Business Administration (SBA), borrowers may have up to 25 years to pay them off.

To get a business loan, the owner must apply for one through a qualified lender. The eligibility requirements vary by lender, but generally, they will consider both your business and personal credit scores, annual revenue, debt-to-income ratio (DTI), number of years in business, and more. 

The lender charges interest on the loan, which is determined by the level of risk of the borrower and business. Today, the average interest rate from a bank business loan ranges between 3.19% and 6.78%.

Business loans can be secured or unsecured. Secured loans are backed by collateral, such as property or cash. If the borrower doesn’t repay the loan, the lender can seize that asset to make up for the loss. Unsecured business loans are not backed by an asset, so they’re considered higher risk for the lender. Still, the business owner may be required to sign a personal guarantee, meaning they are personally responsible for repaying the loan if the business doesn’t. 

How Does a Merchant Cash Advance Work?

If you’re wondering, “is a merchant cash advance a loan?” you may be surprised by the answer.

A merchant cash advance is also a form of business financing. However, it works much differently than a traditional business loan.

MCAs are better used for short-term financing needs, or when a business needs access to fast cash. The MCA provider will give the business an upfront sum, often within a day or two. The repayment period is usually quite short — typically, six to 24 months.

MCAs also don’t come with as high of standards for personal or business credit. Rather, eligibility is based on sales numbers. There may also be a few restrictions on how you can use the money. And there’s no collateral involved, other than your future debit/credit card sales.

Merchant cash advances are not loans for that reason. The MCA company is actually providing an advance on the borrower’s future sales. You repay the advance daily (sometimes weekly) with the provider drawing a set percentage directly from the business bank account. 

That percentage is known as the holdback, which can range between about 5% and 20%. For example, say your MCA holdback is 10%. If you did $12,000 in credit card sales one day, the MCA provider would draw $1,200. If you did $8,000 in sales the next day, the MCA provider would take $800. The holdback percentage never changes, but the amount you pay daily will fluctuate according to the volume of sales. 

How Much Do MCAs Cost?

Rather than charging an annual percentage rate, MCA companies charge a factor rate, which usually ranges between 1.2 and 1.5. To calculate the cost of an MCA, you multiply the amount borrowed by the factor rate. So say you borrowed $40,000 with a factor rate of 1.3; you’d repay a total of $52,000 ($40,000 advance + $12,000 in fees).

This pricing model can make it tough to compare the cost of an MCA with a business loan. MCA factor rates are paid on the full amount upfront, while interest on a business loan is charged on the current balance and gets smaller as you pay down the principal.

When expressed as an annual percentage rate, fees on merchant cash advances are quite high. The large upfront cost and short repayment period mean they can equate to 300% APR or more. 

Differences Between a Business Loan and MCA

Business LoanMCA
Fixed paymentsFluctuating payments
Paid monthlyPaid daily or weekly
Term length of 5+ yearsTerm length of 24 months or less
Interest rate based on borrower’s creditFactor rate based on business’s projected success

Pros and Cons of Business Loans

A business loan may be a good financing option based on your needs. Here’s a closer look at the pros and cons of borrowing money using a business loan.


  • Lower interest rates
  • Longer repayment timeline
  • Fixed payments
  • Paid monthly


  • Requires good credit to qualify
  • Missed payments reported to the credit bureaus

Pros and Cons of MCAs

Merchant cash advances can also offer convenient financing. But they come with their own benefits and drawbacks, too.


  • Doesn’t require great credit to get approved
  • Funds are disbursed quickly
  • Payments are smaller when revenue goes down


  • Very high fees
  • Daily payments
  • Short repayment period
  • Tricky contracts

Need Help With a Merchant Cash Advance?

Borrowing money always comes with some risk, especially if your business is responsible for repaying the loan. Unexpected situations and expenditures can make it tough to keep up with payments at times. That said, a merchant cash advance tends to be a much riskier form of financing for businesses, particularly those that have unstable cash flow. If you’re currently struggling with MCA debt — or any other form of commercial or business financing — hiring legal help may be your best next step to make sure your matters are in the best possible hands. Tayne Law has been helping clients resolve their business and consumer debts for over 20 years. Even if you are not ready to make a decision just yet, call us for a no-obligation phone consultation. We can talk through your concerns and explain our process so you get a better sense of what help is available for the debt you have and for your business. Reach us toll-free at (866) 890-7337 or fill out our short contact form.

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