How Does A Merchant Cash Advance Work

How Does A Merchant Cash Advance Work?

A merchant cash advance (MCA) is a form of financing that provides businesses with quick access to capital. Unlike traditional bank loans, MCAs don’t require good credit or collateral. Instead, the business repays the advance through a percentage of its future credit card sales.

What is a Merchant Cash Advance?

A merchant cash advance provides a business with an upfront sum of money in exchange for a fixed percentage of the business’s future credit card sales. The lump sum payment helps businesses meet immediate capital needs.MCAs are not considered loans since the businesses are selling a portion of their future receivables. There is no set repayment schedule. Instead, the business makes payments until the advance is repaid in full, which typically takes 3-18 months.The cost of an MCA is determined by a factor rate, usually between 1.1-1.5. For example, if a business gets a $50,000 advance with a factor rate of 1.4, they will repay $70,000. The $20,000 difference covers the fee charged by the MCA provider.

How Do Merchant Cash Advances Work?

There are two main ways MCA providers collect payments:

  • Percentage of Credit Card Sales: The MCA company gets a percentage, usually 10-20%, of the daily credit card sales until the advance is repaid. The higher the credit card volume, the faster the advance is paid back.
  • Fixed Daily/Weekly Payments: The provider withdraws a fixed amount from the business’s bank account each day or week. The amount is based on projected monthly revenue.

With either method, the business gets the lump sum payment upfront and the MCA company collects payments until the advance is repaid. There is no set repayment schedule.

Pros and Cons of Merchant Cash Advances


  • Fast funding: Businesses can get approved and funded in as little as 24 hours.
  • Flexible requirements: MCAs work with startups, businesses with bad credit, or previous financial struggles. No collateral is required.
  • Manage cash flow: Repayment rises and falls with credit card sales volume, so slower months have lower payments.


  • Expensive: MCAs carry annual percentage rates over 100% in many cases.
  • Frequent payments: Daily or weekly payments can strain cash flow, especially in slower months.
  • Risk of debt cycle: The high cost and frequent payments may trap businesses in a cycle of debt.

Who Should Use a Merchant Cash Advance?

MCAs work best for businesses that:

  • Need funds quickly to seize opportunities or cover short-term costs
  • Don’t qualify for traditional financing options
  • Have steady credit card sales to repay the advance

Businesses should avoid MCAs if they:

  • Rely heavily on cash or check payments
  • Need a loan to invest in long-term growth
  • Have consistent trouble meeting financial obligations

What is Needed to Qualify for a Merchant Cash Advance?

The application process for MCAs is simple. Providers mainly look at:

  • Time in business – Most require at least 9-12 months
  • Monthly credit card sales volume – Minimum of $5,000-$10,000
  • Bank statements – To verify credit card processing history
  • Credit score – Some providers check, but poor credit often OK

If approved, businesses can get funded in as little as 24 hours in most cases. The simplicity and speed of MCA applications is a major benefit over traditional financing.

How Much Does a Merchant Cash Advance Cost?

Instead of interest, MCAs charge a factor rate, usually 1.1-1.5. To calculate the total repayment amount:Advance Amount x Factor Rate = Total RepaymentFor example:

  • $30,000 advance
  • 1.4 factor rate
  • $30,000 x 1.4 = $42,000 total repayment

The $12,000 difference covers the MCA provider’s fee. While not technically interest, this equates to an annual percentage rate between 60-120% in most cases.

What Happens if You Default on an MCA?

If a business defaults on its merchant cash advance, the provider can take legal action to recover the unpaid amount. Since MCAs are not loans, providers have more flexibility in pursuing defaulted accounts.Potential consequences of defaulting include:

  • Lawsuits – Providers can sue for the remaining balance.
  • Wage garnishment – Courts can order employers to deduct payments from paychecks.
  • Bank levies – Providers can seize funds from bank accounts.
  • Collateral seizure – Businesses may have pledged collateral that can be claimed.

Defaulting can also hurt your personal credit score and business credit profile. Avoid defaults by carefully evaluating your repayment ability before getting an MCA.

Alternatives to Merchant Cash Advances

Some other financing options for businesses include:

  • Term loans – Provided by banks/online lenders, fixed monthly payments.
  • Business lines of credit – Revolving credit lines with interest rates around 10-28%.
  • Invoice factoring – Selling unpaid invoices to get immediate cash.
  • Equipment financing – Loans using equipment/machinery as collateral.
  • 401(k) business financing – Using personal 401(k) funds as a loan to your business.

While MCAs offer fast and easy financing, these alternatives may provide lower rates and more flexibility. Shop around to find the best option for your business goals and cash flow.

The Bottom Line

Merchant cash advances provide a quick influx of capital by purchasing a percentage of future credit card sales. The approval process is simple and funding is fast. However, the high cost and aggressive repayment structure may not suit all businesses. Carefully weigh the pros and cons before getting a merchant cash advance. With the right repayment plan, MCAs can be an effective short-term financing solution.

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