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Should You Consider a Merchant Cash Advance?

Updated Oct 23, 2023

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If your business is suffering from cash flow issues, you’re not alone. In fact, according to a survey from U.S. Bank, 82% of small businesses fail because of cash flow problems. Cash flow issues happen when your monthly expenses exceed the amount of 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, maybe you’re considering some type of small business funding. In some cases, a merchant cash advance is a useful option. But be careful: MCAs are expensive, and they aren’t federally regulated. 

What is a merchant cash advance?

A merchant cash advance (MCA) allows you to cover temporary cash flow problems with future sales. You’ll receive a one-time, lump-sum payment and then repay the funds with a percentage of your sales over time.

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

Did You Know?Did you know

With MCAs, you’ll receive a lump-sum payment that you’ll repay with a percentage of your sales. Learn all the differences between a business loan and merchant cash advance.

How does a merchant cash advance work?

Applying for and receiving an MCA is a relatively quick process. The amount you’re approved for will depend on the volume of your daily credit card transactions. 

You could receive anywhere from a few thousand dollars to over $200,000, and you might be able to access the funds in just a few days. However, the repayment terms are typically short, often less than 18 months.

The cost depends 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. A better credit score translates to a lower factor rate. 

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

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% to 20%. 

Most lenders deduct these funds from your account automatically. The repayment terms are based on a percentage of your daily sales, so you won’t find yourself in a financial bind if sales suddenly slow down in your business.

When should you use a merchant cash advance?

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 loan from the bank.

Even if you do qualify for a loan, you may need immediate access to funds. MCAs are processed much faster than small business loans and come with 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 cover temporary cash flow issues, or pay for a one-time business expense, an MCA could help.


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

What do you need to get a merchant cash advance?

It’s easy to qualify for an MCA because, unlike with a small business loan, you don’t have to show years of business history. In many cases, you don’t even need excellent credit history to qualify.

You will need to be able to 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. 

Traditional banks don’t typically offer MCAs, so you’ll need 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. 

FYIDid you know

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

Once you’ve found a lender, you’ll fill out the application 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

Pros and cons of merchant cash advances 

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


  • They have a fast application and approval process. MCAs are easy to apply for, and the approval process is quick. Unlike with small business loans, MCA paperwork is minimal, and you could receive the funds within a few days. 
  • They’re a viable alternative to a small business loan. Some businesses don’t have the credit history or business experience to qualify for a small business loan. MCAs are a good alternative, provided that you can show a high volume of credit card transactions. 
  • They 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. 
  • They don’t require collateral. Other than committing to a percentage of your future credit card payments, there are no collateral requirements


  • They’re very expensive. Merchant cash advances can be incredibly expensive, especially if you receive a high rate factor. But even with a low rate factor, you could end up with an APR as high as 35%. 
  • They’re 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. 
  • They 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.
  • They 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. 
Key TakeawayKey takeaway

The application and approval process for MCAs is quick and easy, and the funds can be used for anything. But they can be very expensive and won’t help you build credit.

Merchant cash advance FAQs

How is a merchant cash advance repaid?

When you take out an MCA, your lender will automatically deduct a percentage of your daily credit card sales from your bank account. 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 are, the faster you’ll repay the advance. 

What happens if you default on a merchant cash advance?

The consequences for 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 them, 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. 

Do merchant cash advances report to credit bureaus?

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 either. 

What are some alternatives to merchant cash advances?

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 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 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. 

The bottom line on merchant cash advances

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’re soon in need of another cash advance. This fast cash can trap you in an ongoing cycle of debt.

Here are a few things to do before applying for an MCA:

  • Find a lender you trust. Finding a reputable lender makes all the difference when it comes to your MCA experience. Consider multiple lenders, and 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 determine whether an MCA is worthwhile.
  • Ask for an early repayment incentive. If you repay your merchant cash advance early, you’ll raise your APR. Ask your lender if they will lower the flat fee if you pay off your cash advance early. 
Jamie Johnson
Contributing Writer at
Jamie Johnson is a Kansas City-based freelance writer who writes about finance and business. She has also written for the U.S. Chamber of Commerce, Fox Business and Business Insider. Jamie has written about a variety of B2B topics like finance, business funding options and accounting. She also writes about how businesses can grow through effective social media and email marketing strategies.
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