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Merchant Cash Advances: What They Are and How to Get One

Discover the essentials of Merchant Cash Advances (MCAs), a swift and adaptable funding option for businesses. Learn how MCAs provide upfront capital with flexible repayment from credit card sales, offering a practical alternative to traditional loans for immediate financial needs.

Adele Katz
Adele Katz
November 14, 2023

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Merchant cash advances can be a quick and flexible financing option for businesses in need of immediate capital.

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In business finance, flexibility and accessibility are key to maintaining a healthy cash flow and supporting growth initiatives. Traditional bank loans, while useful, may not always be the best or most readily available option for business owners in need of quick funding. This is where Merchant Cash Advances (MCAs) come into play. 

As an alternative financing option, MCAs offer unique advantages and can be a lifeline for businesses looking to capitalize on immediate opportunities or manage unforeseen expenses.

Understanding Merchant Cash Advances

What is a Merchant Cash Advance?

A Merchant Cash Advance is a form of business financing where a company receives a lump sum of capital upfront. In return, the business agrees to pay back this advance with a portion of its daily credit card receipts. This arrangement is particularly attractive to businesses with significant credit card sales but may not qualify for traditional loans due to stringent credit requirements or the need for collateral.

MCAs are primarily used by businesses that need quick access to capital and typically cater to industries such as retail, restaurant, and service-based sectors where credit card transactions are frequent and high-volume. This funding method is not based on an interest rate system but on a factor rate, making it a viable option for businesses looking for flexible repayment terms that align with their sales trends.

The Basics of How MCAs Work

With an MCA, the process begins when a business applies and gets approved for an advance based on its credit card sales history. Upon approval and receipt of the funds, the business will repay the advance through a predetermined percentage of daily or weekly credit card sales. This percentage is known as the "holdback" and will continue until the advance is paid in full.

The repayment structure is designed to fluctuate with the business's sales volume. During times of high sales, the business will pay back more, and during slower periods, they will pay less. This dynamic repayment schedule can be particularly advantageous for businesses with seasonal sales patterns or those that experience significant fluctuations in revenue.

The Factor Rate Explained

The pricing of a Merchant Cash Advance is principally determined by what is known as a factor rate. In contrast with conventional loans that rely on an annual percentage rate (APR) for interest calculation, MCAs employ a factor rate to set the aggregate payback sum. This factor rate is often represented as a numerical figure between 1.1 and 1.5.

For example, if a business receives a $10,000 advance with a factor rate of 1.2, the business would owe $12,000 in total. This amount includes the original $10,000 advanced plus $2,000 in fees, which represents the cost of financing. The factor rate is determined based on several risk-related factors, including the business's sales volume, consistency, and duration of operation.

This unique repayment model means that the business doesn't incur traditional interest over time; instead, the cost of the advance is fixed, regardless of how quickly or slowly the advance is repaid. This can be both an advantage and a disadvantage: it's predictable, but if the business can repay quickly, it doesn't save on costs as it would with a declining balance interest structure.

The Advantages of Merchant Cash Advances

Quick Access to Funds

Quick access to funds

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MCAs are known for their quick approval and funding processes. After a business applies for an MCA, the approval can come within hours or a day, and the funds can be available almost immediately thereafter. This rapid turnaround is crucial for businesses that need urgent funding to take advantage of time-sensitive opportunities, such as a bulk discount on inventory or an unexpected but necessary expense.

The speed of funding is facilitated by the streamlined application process typical of MCA providers. Unlike traditional bank loans that can require extensive documentation and long processing times, MCAs often need minimal paperwork. The main focus is on past and current credit card sales, which can be quickly verified.

No Need for Collateral

MCAs are an unsecured form of financing. This means that business owners are not required to pledge assets as collateral to receive the advance. Traditional bank loans, particularly those for larger amounts, often require collateral, which can put personal and business assets at risk in the event of default.

The lack of a collateral requirement is especially beneficial for new businesses or those that do not have substantial assets to pledge. It also simplifies the application process, as there is no need to evaluate the value of collateral or place liens on property.

Flexible Repayment Structure

The repayment terms of an MCA are inherently flexible, which can be a significant advantage for businesses with fluctuating revenues. Instead of fixed monthly payments, MCAs are repaid with a percentage of daily or weekly credit card sales. This means the amount paid back each period adjusts with the business's cash flow.

During periods of high sales, the business will pay off the advance more quickly, while during slower periods, the payment amounts will be smaller. This adaptive repayment approach can help businesses manage cash flow more effectively since they are not locked into a fixed repayment amount that could strain finances during downtimes.

“MCA providers are often more interested in the consistent flow of credit card transactions than other credit metrics”

High Approval Rates

MCA providers generally have less stringent approval criteria than banks or traditional lenders. Because the advance is based on the business's credit card sales history rather than credit scores, even businesses with less-than-perfect credit histories may be eligible for an MCA.

This is particularly beneficial for businesses that have been turned down for traditional loans due to credit issues or those that haven't been in operation long enough to establish a strong credit history. MCA providers are often more interested in the consistent flow of credit card transactions than other credit metrics, which opens the door for a wider range of businesses to obtain financing.

How to Get a Merchant Cash Advance

Assessing Your Needs and Qualifications

Identifying Your Financial Needs: First, determine why you need the capital and how much you need. MCAs are suitable for various purposes, from covering cash flow shortages to buying inventory. However, it’s important not to overextend your business with an advance larger than you can handle.

Evaluating Your Ability to Repay: Look at your business’s average monthly credit card sales to estimate how much of an advance you could comfortably repay. This will give you an idea of the holdback percentage that you can manage without straining your business finances.

Understanding Qualification Criteria: MCA providers typically require businesses to have a minimum amount of monthly credit card transactions and a certain period of business operation. They may also review your credit score, but this is usually not the deciding factor.

Finding the Right MCA Provider

Researching Providers: Look for MCA providers with a solid reputation in the industry. You can check online reviews, ask for referrals from other business owners, or consult industry bodies that oversee fair lending practices.

Comparing Offers: Not all MCAs are created equal. You should compare offers from different providers to find the most favorable terms. Pay particular attention to the factor rate, the holdback percentage, and any additional fees that might apply.

The Application Process

The documentation process

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Preparing Documentation: Gather necessary documents before applying. While requirements vary by provider, you will likely need to present recent credit card processing statements and bank statements, your business tax ID, and possibly your business license.

Completing the Application: Many MCA providers offer an online application process that can be completed quickly. You’ll be asked to fill in information about your business and submit the required documentation.

Quick Approval and Funding: If your application is approved, you could receive the funds in your business account in as little as 24 hours. The speed of approval and funding is one of the most compelling benefits of an MCA.

“An MCA might have a high factor rate, making it more expensive than other forms of financing”

Understanding the Terms and Conditions

Reading the Fine Print: Before agreeing to an MCA, ensure you fully understand the terms. This includes not only the factor rate and the holdback percentage but also the length of the repayment period, any penalties for early repayment, and what happens if sales are lower than expected.

Considering Costs: Be aware of the total cost of the advance. An MCA might have a high factor rate, making it more expensive than other forms of financing. Calculate the total amount you will repay to determine if it is reasonable for your business.

Seeking Professional Advice: If you’re unsure about any aspect of the MCA, consult with a financial advisor or attorney. They can help clarify the terms and advise whether an MCA is the best option for your business needs.

Comparing MCAs to Other Financing Options

MCAs vs. Traditional Bank Loans

When a business requires financing, it’s important to compare the different options available to find the one that best suits its needs. Merchant Cash Advances (MCAs), traditional bank loans, online loans, and lines of credit are common options, each with advantages and disadvantages. Here’s how MCAs stack up against these alternatives.

Bank Loans - Pros:

Bank Loans - Cons:

MCAs - Pros:

MCAs - Cons:

MCAs vs. Online Loans

Online Loans - Pros:

Online Loans - Cons:

MCAs - Pros and Cons: Similar to those listed above in the comparison with bank loans.

MCAs vs. Lines of Credit

Lines of Credit - Pros:

Lines of Credit - Cons:

MCAs - Pros and Cons: Refer to the points mentioned in the comparisons above.

The Costs Associated with Merchant Cash Advances

Understanding the costs associated with Merchant Cash Advances (MCAs) is crucial for business owners considering this financing option. Unlike traditional loans with annual percentage rates (APRs), MCAs operate with a unique cost structure that can significantly affect the overall repayment amount.

Factor Rates and Effective APR

Factor Rates:

Effective APR:

Additional Fees

Origination Fees:

Processing Fees:

Other Potential Costs:

Important Considerations:

Transparency and Comparison

Business owners should ensure they are working with MCA providers who are transparent about all the fees and costs associated with their products. Comparing the total cost of capital among different MCA offers is essential. This includes not only the factor rate but also any additional fees that will impact the total amount the business will pay.

Best Practices for Using a Merchant Cash Advance

Leveraging a Merchant Cash Advance (MCA) effectively is pivotal for maximizing its benefits while mitigating potential financial strain on a business. Below are some best practices to follow when using an MCA.

Have a Clear Purpose for the Funds

Monitor Your Sales and Adjust Budgets

Plan for Repayment

Evaluate the Impact on Your Business

Additional Considerations

Alternatives to Merchant Cash Advances

Short-Term Business Loans

- short-term business loans are often utilized by companies seeking immediate funding

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Short-term business loans are a popular alternative due to their structured repayment plans. These loans are paid back over a set period with consistent, fixed payments. This stability allows business owners to budget effectively, as they can anticipate the exact outflow of funds each month, unlike the variable repayments of an MCA, which fluctuate with sales volume. This predictability can be crucial for businesses looking to manage their cash flow with greater precision.

Furthermore, the cost associated with short-term loans is typically lower than that of MCAs. The interest rates on these loans are often more competitive, which could lead to substantial savings over time, making them a more economical choice in the long run.

Another key advantage is the speed of funding. Short-term loans from online lenders can provide quick access to capital, often just as swiftly as MCAs. This rapid turnaround time ensures that urgent financial needs can be met promptly without resorting to the high costs of an MCA.

Invoice Factoring

Invoice factoring is a suitable option for businesses with significant amounts of capital tied up in unpaid invoices. This approach provides immediate cash flow by allowing businesses to sell their outstanding invoices at a discount. This instant infusion of cash can be essential for maintaining operations and funding growth without the delay of waiting for customer payments.

Choosing invoice factoring means businesses can avoid accumulating debt. This sale of assets (invoices) does not add financial liabilities to the balance sheet, preserving the company's credit rating and financial health.

Moreover, invoice factoring places emphasis on the creditworthiness of a business's customers rather than the business itself. For companies with less-than-perfect credit, this can be a more accessible means of financing, as the approval depends more on their customers' ability to pay than on their own credit history.

Equipment Financing

When it comes to funding the purchase of machinery or equipment, equipment financing can be a tailored and strategic choice. This type of financing is designed specifically for the acquisition of equipment, with the financed equipment often serving as collateral for the loan itself.

Equipment financing can also provide tax benefits. Businesses may be able to claim deductions for depreciation, interest, and potentially the full purchase price of the equipment. These tax incentives can significantly lower the real cost of purchasing new equipment.

By choosing equipment financing, businesses can preserve their working capital. Rather than allocating a lump sum for equipment purchases, the cost is spread over the life of the equipment, allowing the business to retain cash for other operational needs.


Merchant Cash Advances provides a unique and flexible solution for businesses in need of immediate funding. While they are not the cheapest form of financing, their accessibility and simplicity make them a viable option for many business owners. Before opting for an MCA, it's essential to thoroughly understand the costs and terms and consider how it fits into your overall financial strategy. Whether it's for managing cash flow dips, inventory purchases, or other short-term needs, an MCA can be the financial tool that helps steer a business toward growth and success.

Remember, like all financial products, MCAs should be used responsibly and with a clear understanding of the associated costs. For those looking for a more traditional route, applying for a loan online offers a compromise between the speed of an MCA and the structured repayment of conventional loans. Whatever your choice may be, ensure it aligns with your business goals and financial capabilities.

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