If your business needs fast cash, you might be considering a merchant cash advance (MCA). But is a merchant cash advance the same thing as a loan? Not exactly, and understanding the difference can have a big impact on your business’s bottom line.
Unlike traditional loans, which are repaid in fixed monthly installments with interest, an MCA is an advance on your future sales that’s repaid daily or weekly as a percentage of your revenue. This structure makes MCAs easier to qualify for and faster to access, but often far more expensive than business loans.
Quick Answer: No, a merchant cash advance is not a loan. It’s an advance on your future sales that you repay daily or weekly through a percentage of your revenue.
How Does a Business Loan Work?
Business loans are a form of financing for qualified businesses. Banks, credit unions, and other approved lenders provide them. Companies use business loans to pay for various expenses related to running a business, such as purchasing new equipment, payroll, supplies, or 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 through a qualified lender. The eligibility requirements vary by lender, but generally, they will consider 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 compensate for the loss. An asset does not back unsecured business loans, 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 have as high of personal or business credit standards. Instead, eligibility is based on sales numbers. There may also be a few restrictions on using 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), and the provider draws 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 sales volume.
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 Loan | MCA |
| Fixed payments | Fluctuating payments |
| Paid monthly | Paid daily or weekly |
| Term length of 5+ years | Term length of 24 months or less |
| Interest rate based on borrower’s credit | Factor 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.
Pros:
- Lower interest rates
- Longer repayment timeline
- Fixed payments
- Paid monthly
Cons:
- 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 have their own benefits and drawbacks.
Pros:
- Doesn’t require excellent credit to get approved
- Funds are disbursed quickly
- Payments are smaller when revenue goes down
Cons:
- Very high fees
- Daily payments
- Short repayment period
- Tricky contracts
Need Help With a Merchant Cash Advance?
Merchant cash advances can feel like a lifeline, but the daily payments and high fees often create new financial strain. If your MCA debt is cutting into your business’s cash flow, you don’t have to navigate it alone.
For over 20 years, Tayne Law has helped businesses and individuals find relief from overwhelming debt. Call us today for a free, no-obligation consultation at (866) 890-7337 or fill out our short contact form. We’ll explain your options clearly so you can protect your business and move forward with confidence.
