Business Loans

What is a Merchant Cash Advance (MCA) and How Does it Work?

Apr 23, 2022 • 9 min read
Merchant Cash Advance MCA
Table of Contents

      If traditional small business loans aren’t the right fit for your business, a merchant cash advance (also known as an MCA) might be a good alternative. This type of funding offers small business owners access to quick funding on hand. But in return, they have to offer up a portion of their future sales. Unlike a loan, borrowers usually don’t have to offer up collateral, and business owners with less-than-stellar credit are still considered. Let’s take a closer look at merchant cash advances, like merchant cash advance vs. factoring, how they work, and how to get one.

      How Is a Merchant Cash Advance Different From Invoice Factoring?

      Invoice factoring is when a company offers funds in return for accounts receivable or invoices. These are invoices that already exist for sales that already took place, not future invoices. With factoring loans, business owners sell their invoices in return for only taking a cut of the total upfront and letting their lender take the rest. And the lender sometimes takes over the invoices and manages the collection for it.

      How Does a Merchant Cash Advance Work? 

      With a merchant cash advance, you’ll receive a lump sum upfront. Typically that sum will range from $5,000 to $200,000 depending on your needs and qualifications. This makes MCAs a great option for businesses in need of a quick cash infusion with little time, or for businesses that are just starting out and might have a harder time obtaining other types of funding. The repayment will be made with a cut of your future sales.

      How Is Interest For An MCA Charged?

      MCA typically doesn’t have interest rates, but rather have fator rates. MCA may be more expensive than other types of fundings. This can make this form of funding significantly more costly and can make it difficult for some business owners to repay. 

      Typically MCAs will have a factor rate, with the lowest coming in at around 1.2. What this means is you would pay back 120% of what you borrowed. As you can see, this could easily increase your repayment by quite a bit. These factor rates can vary though, so be sure to double and triple-check what rate your MCA offer has before signing.

      What Is the Repayment Structure For a Merchant Cash Advance?

      Once funded, you’ll start repaying that MCA with your daily or weekly sales. Typically this will be done in one of two ways. Either your lender will take a percentage of each credit card transaction your business sees each day, or they’ll take fixed daily withdrawals from a merchant account each day. You’ll likely have other fees to pay as well, like an origination fee or a processing fee that can tack on a hefty amount to your total. 

      Percent of sales:

      Every time a customer pays your business using a credit card, a percentage of that money will go to your lender to pay for the MCA. So there will be less money coming into your business on a daily basis that actually makes it into your hands.

      Fixed daily withdrawal:

      If you aren’t paying with a percent of each credit card sale you make, you will be paying with daily withdrawals from your business bank account. This is usually called ACH, or automated clearing house, withdrawals. It can be done on a daily, weekly, or monthly basis.

      What Are the Application Requirements For an MCA?

      It’s always a good idea to have your business finances in order when seeking funding and applying for loans. That includes being sure to have your business documents organized and ready to submit. 


      Those documents include:

      • Proof of time in business
      • Business bank statements
      • Your business credit score
      • Your business plan
      • Bank statements
      • Your balance sheet


      Of course, you’ll also need the super simple cash advance application for your MCA ready to submit as well. But once you do submit all your documents, you could be approved and receive funding in as little as 24 hours. 

      See MCA options and how to get the best rate (Cash Advance Page CTA)

      Is a Merchant Cash Advance Right For Your Business?

      When deciding whether a merchant cash advance is right for your business, there’s a lot to consider. You should think about a merchant cash advance vs. bank loans. Also, consider the terms of this type of funding and your eligibility. Before taking on funding, make sure you’ll be able to pay it off. You don’t want to get trapped in a never-ending cycle of taking out funding to pay off funding or constantly having your business in debt. 

      Let’s take a look at the pros and cons of a merchant cash advance to help you. 

      Pros of a Merchant Cash Advance

      Quick to apply

      As we mentioned above, applying for and getting funding from an MCA can be a fairly quick process that can help business owners who are in a bind. If you need cash quickly or don’t have the qualifications for other funding, this is a great option for you. 

      Good for borrowers with low credit 

      Again, if you have low credit or little time in business, then an MCA might be the right way to go for your funding needs. Typically borrowers can have lower credit because the lenders are looking for high daily sales to see that borrowers will be able to make their payments. 

      No collateral is needed

      Your daily sales are securing your MCA so you don’t need any other collateral to guarantee it. Once your lender sees you have the sales to be able to pay back what they lend you, you should be all set. 

      Low revenue = low payments

      If you go the route of repaying with a portion of your sales each day, you could be in luck for any low revenue periods of time or low sales days. 

      Cons of a Merchant Cash Advance

      High Cost of Capital

      As we described above, the Cost of Capital for a merchant cash advance can end up being quite pricey by the time you’ve finished paying off the funding. 

      No benefit to repaying early

      There is also no benefit to repaying early when it comes to an MCA. With some funding, you can pay back early and end up paying less interest in the process. That’s not the case with an MCA, however. You’re locked into paying certain fees on a fixed schedule so there’s no option to pay off early and pay less interest over the long run.

      High revenue = high repayments

      Just like low revenue means low repayments, high revenue can mean high repayments. Again, because a percentage of sales will be taken, that amount can be more on days you do really well.

      Alternatives to a Merchant Cash Advance

      A business line of credit can also offer a quick infusion of cash to any business. But the great thing is, you only pay interest on the money you actually spend from your line of credit. Kind of like a credit card with a really high limit. The interest rates are a bit more manageable than those of an MCA. However, you will likely need a fairly good credit score of 560 or more and a business track record of at least six months in business.

      Business Credit Card

      If you only need a couple of thousand dollars in funding, a business credit card could be your solution. These are good for brand new businesses that don’t have the qualifications for other types of funding. Just be sure to check when you’ll have to start paying interest because you could find yourself with a hefty APR if you don’t pay off your balance each month. 

      Equipment Financing

      If you’re specifically looking for financing to buy equipment for your business, then equipment financing could be the move. The equipment acts as collateral so you don’t need to offer up any of your own, and the interest rates are far better than those you’ll get with an MCA. However, you’ll need a credit score of 650 or higher for this funding and at least 12 months in business. 

      Compare your business loans options here.


      Disclaimer: The information provided in this blog post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. For advice specific to their situation, readers should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.


      About the author
      Nina Godlewski

      Nina is a content marketer with a journalism background and a bachelor’s degree in communication studies from Northeastern University. She loves to research complex business topics and break them down to make them more accessible for readers. She worked as a marketing writer for Fundera, covering small business topics like lending, credit cards, software, and services. She’s also written for LendingTree, Value Penguin, Newsweek, and Business Insider.

      Share Article: