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Updated Mar 25, 2024

What is a Merchant Cash Advance?

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Jamie Johnson, Business Operations Insider and Senior Analyst

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If your business suffers from cash flow issues, you’re not alone. Just ask other small business owners — being strapped for cash is beyond common, especially in a company’s early days. Cash flow issues happen when your monthly expenses exceed the cash you have on hand. The cause might be slow sales or customers falling behind on payments. Poor cash flow hurts your ability to invest in your business and affects your daily operations. 

If you’ve been dealing with cash flow issues, you might be considering some type of small business funding. In some cases, a merchant cash advance (MCA) is a helpful option. But be careful: MCAs are expensive and aren’t federally regulated. 

What is an MCA?

An MCA is an alternative financing method in which a business receives a lump-sum payment in exchange for a specific percentage of its future credit and debit card sales. If your business accepts credit cards, an MCA can help you cover temporary cash flow problems with future sales. 

An MCA can be a good option for businesses that process a high volume of credit card transactions and need fast access to cash. However, an MCA won’t be an option if your business doesn’t accept credit card transactions.

Did You Know?Did you know

Business loans and MCAs have key differences. MCAs can fund quickly but have restricted borrowing limits. In contrast, business loans may take longer to process but can provide more significant funding.

How does an MCA work?

Here’s how a merchant account works: 

  1. You apply for an MCA with a lender: Applying for and receiving an MCA is relatively quick. The amount you’re approved for will depend on your daily credit card transaction volume. (More on choosing a lender below.)
  2. You receive your funds: You could receive anywhere from a few thousand dollars to over $200,000 and you might be able to access the funds in a few days. During this time, you can use the funds for practically anything — MCA contracts don’t restrict your spending categories like some other loans, including Small Business Administration (SBA) loans. That said, most small businesses use MCA funds as working capital or to bolster cash flow.
  3. You repay your MCA: Your lender will take a percentage of your daily credit card transactions until funds are repaid. This percentage is known as the holdback rate and it usually ranges from 10 percent to 20 percent. Most lenders deduct these funds automatically from your merchant account or bank account. The repayment terms are based on a percentage of your daily sales, so you won’t be in a financial bind if your business suddenly slows down. Note that MCA repayment terms typically are short, often less than 18 months.

What costs are involved in an MCA?

MCA costs depend on the amount you receive and your factor rate, which ranges from 1.1 to 1.5. Your business’s financial strength determines your factor rate and a better credit score translates to a lower factor rate. 

For example, say you receive an MCA for $100,000 and your factor rate is 1.2. That means you’ll owe $120,000 in total. 

When should you use an MCA?

Although MCAs don’t have the best reputation, there are times when taking out one could be the right choice for your business. For instance, they can be a good option for businesses that need fast access to cash but don’t qualify for a bank loan.

Even if you qualify for a loan, you may need immediate access to funds. MCAs are processed much faster than small business loans and have minimal paperwork. 

Overall, MCAs are a good option for businesses that need fast funding to cover short-term expenses. If you run a seasonal business, need to address temporary cash flow issues or must pay for a one-time business expense, an MCA can help.


An MCA should be a last resort, not a go-to funding option. For other sources of working capital, consider our picks for the best business loans.

What do you need to get an MCA?

It’s easy to qualify for an MCA because, unlike small business loans, you don’t have to show years of business history. You often don’t even need an excellent credit history to qualify.

Here’s what you need to do to get an MCA.

  • A lender that offers MCAs: Traditional banks don’t typically offer MCAs, so you’ll need to find an alternative lender. Lending marketplaces are a good place to look because you can fill out a single application and compare offers from multiple lenders. 
  • Sales history: After you find a lender, you must show at least six months of credit card transactions. A history of good sales can make it easier for small business owners with bad credit to qualify. 
  • Administrative information: You’ll fill out the application with your lender and provide the following information:
    • Proof of identity
    • Contact information
    • The amount you want to borrow
    • Company information
    • Bank and credit card processing statements
    • Business tax returns

Here are a few best practices to keep in mind when applying for an MCA.

  • Find a lender you trust: A reputable lender makes all the difference when it comes to your MCA experience. Consider multiple lenders; when you find a few you like, check their Better Business Bureau rating to see what experiences other customers have had. 
  • Calculate precisely how much you’ll owe: Once you know your factor rate, calculate the total cost of what you’ll end up owing. The holdback rate can help you determine how much you can expect to repay daily. Knowing these figures can help you decide whether an MCA is worthwhile.
  • Ask for an early repayment incentive: If you repay your MCA early, you’ll raise your annual percentage rate (APR). Ask your lender if it will lower the flat fee if you pay off your cash advance early. 
FYIDid you know

Most banks and conventional lenders don’t offer MCAs. Consider an alternative lender if you need an MCA for your business.

Pros and cons of MCAs 

MCAs have distinct advantages and disadvantages that you should be aware of before accepting a loan.


  • MCAs have a fast application and approval process: MCAs are easy to apply for and the approval process is quick. Unlike small business loans, MCA paperwork is minimal and you can receive the funds within a few days. 
  • MCAs are viable alternatives to small business loans: Some businesses don’t have the credit history or experience to qualify for a small business loan. MCAs are a good alternative — if you can show a high volume of credit card transactions. 
  • MCAs can be used for anything: When you take out an MCA, there are no requirements for how you can spend the cash. You can use the funds however you feel they would be the most useful. 
  • MCAs don’t require collateral: Other than committing to a percentage of your future credit card payments, there are no business collateral requirements because an MCA is an unsecured loan.


  • MCAs are very expensive: MCAs can be incredibly expensive, especially if you receive a high factor rate. But even with a low factor rate, you could end up with an APR as high as 35 percent. 
  • MCAs are not federally regulated: MCAs are regulated by the Uniform Commercial Code in your state. Since they aren’t federally regulated, they aren’t subject to laws like the Truth in Lending Act, which protects consumers from unfair lending practices. As a result, many business owners find MCAs overly complex and difficult to understand. 
  • MCAs won’t help you build business credit: Your lender won’t report on-time payments to the major credit bureaus, so an MCA won’t build your business credit. The advantage is that it can’t hurt your credit, either.
  • MCAs can cause more cash flow problems: While an MCA provides short-term relief, it can cause more cash flow problems over time. The mandatory daily payments can become a burden and trap your business in a cycle of debt. 

The best MCA providers

Two of our picks for the best business lenders that offer MCAs:

  • This online marketplace educates you about the types of financial products available through its lending partners, including MCAs. You’ll fill out a short questionnaire and then will connect you with lenders that suit your needs. Learn more about why this platform is a great choice for comparing MCA offers via our review.
  • Rapid Finance: MCAs from Rapid Finance range in size from $5,000 to $500,000. This lender’s MCA application takes just a few minutes and you can take three to 18 months to complete your loan. Notably, Rapid Finance uses “complete” instead of “repay” — this lender lacks fixed payment terms and instead estimates a funding period based on your receivables. Explore this lender’s offerings via our Rapid Finance review.


When you take out an MCA, your lender will deduct a percentage of your daily credit card sales from your bank account automatically. These payments will continue until the cash advance is repaid in full.

The repayment period usually lasts up to 18 months. The higher your sales, the faster you’ll repay the advance.

The consequences of defaulting on an MCA depend on the exact terms of your agreement. MCAs aren’t considered loans, so they aren’t governed by usury laws. Instead, MCAs are considered a purchase contract between you and the lender.

If you default, your lender could sue you for the amount you owe and you could put your personal and business assets at risk. If you’re concerned about the possibility of default, your best bet is to try to renegotiate the terms of your agreement with your lender.

No. An MCA is not considered a loan and your lender won’t report timely payments to the credit bureaus. That means an MCA won’t help you build your business credit score. But it also means that if you fall behind on your payments, it won’t hurt your score.

If you’re looking for alternatives to an MCA, here are some options to consider.

  • Small business loan: If you have an excellent credit score, consider choosing a small business loan. Online lenders tend to offer a more straightforward application process than banks and you could receive funding much faster. The rates and repayment terms will be much more favorable than what you’d receive with an MCA.
  • Invoice factoring: If you have a lot of outstanding invoices, invoice factoring could be an option for you. With factoring, you sell your accounts receivable at a discount in exchange for cash. This agreement allows you to receive access to funds without waiting for your customers to pay you.
  • Business cash advance: The repayment terms of a business cash advance will depend on your current cash flow and you’ll receive a lower interest rate than you would with an MCA.

MCAs: Making the right decision

If you’re considering an MCA, proceed with caution. It can help relieve temporary cash flow issues, but you’ll pay incredibly high rates for the convenience.

If you aren’t careful, an MCA could cause more cash flow problems over the long run. Some borrowers find that after receiving an MCA, they soon need another cash advance. This fast cash can trap you in an ongoing cycle of debt. Consider getting offers for other types of loans before committing to an MCA and only sign on the dotted line if you’re sure it’s right.

Max Freedman contributed to this article. 

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Jamie Johnson, Business Operations Insider and Senior Analyst
For more than five years, Jamie Johnson has been guiding business owners on financial matters both big and small. This includes investment advice, insights on business loans and funding options, recommendations on insurance and more. Johnson excels at delivering easy-to-understand direction so entrepreneurs can make the best financial decisions for their businesses and, as a solopreneur herself, she regularly tests business strategies and services. Johnson's expertise can be found in a variety of finance publications, including InvestorPlace, Credit Karma, Insurify and Rocket Mortgage. She has also demonstrated a deep understanding of other B2B topics — including sales, payroll, marketing and social media — for the likes of the U.S. Chamber of Commerce, U.S. News & World Report, CNN, USA Today and Business Insider.
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