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What Is a Merchant Cash Advance?

What Is a Merchant Cash Advance?

A merchant cash advance might be able to help you temporarily make ends meet if your small business seems to experience a drop in sales or seasonality changes. Most applications are accepted as long as you have enough sales history to show that you can repay. But since MCAs aren’t small business loans, they’re not limited by lending laws and can charge top dollar in borrowing fees.

Key Takeaways

  • A merchant cash advance advances capital against future sales.

  • This type of business financing can be easier to qualify for.

  • Borrowing fees can be on the higher end, since they do not have interest rates versus a fee for the amount borrowed.

What Is a Merchant Cash Advance?

An alternative form of business financing known as a merchant cash advance (MCA) provides a lump sum payment based on potential future credit or debit card sales. In essence, you are using projected income to guarantee the advance. However, the advance is not a true business loan, and MCA lenders usually don’t report your payment history to the credit reporting agencies. Therefore, using this financing will not help you establish business credit per se. MCA eligibility requirements are flexible, making it simple for small businesses with poor credit to be approved.

What Is the Process of a Merchant Cash Advance?

A merchant cash advance, usually is given to your small business as a lump sum amount that is based on upcoming business sales. Typically, it is applied to bridge cash flow gaps and increase working capital for businesses. The small business advances work as follows:

  1. The capital is given to your business. The amount your business receives is usually determined by the advance lender which gets deposited to your business bank account.

  2. The financing company charges fees. Instead of an interest rate, MCAs typically charge a factor rate that gets multiplied by the entire loan amount. For example, a $100,000 advance with a factor rate of 1.4 would cost a total of $140,000.

  3. Repayment is based on future sales for your company. Although some MCAs offer weekly payments, repayments are frequently made daily. The advance is repaid once you pay the borrowed amount plus the factor rate and any other fees.

Merchant Cash Advance Refinancing

If you need to stretch out your repayments, some MCA lenders might let you refinance your cash advance. The only problem with refinancing is that the majority of MCA lenders still require that you pay back the full amount of borrowing costs from the initial advance. If you choose to refinance, the new merchant cash advance might add fees and calculate interest on the borrowed amount from the first advance. Once that happens, you will be paying interest on interest, which could keep you in a vicious cycle of debt until you fully repay the advance.

Repayment Terms for Merchant Cash Advances

Merchant cash advances usually have two repayment term options:

Percentage of Gross Sales

The majority of MCAs structure repayments as a holdback, or a percentage of your total monthly sales. The percentage of sales revenue held back ranges from 10% to 20%. The precise amount paid to the financing company varies with each repayment because you are making a percentage payment.

Based on how much money you make in sales, you can calculate your repayment period. But the terms may be drawn out if sales dip at any point.

Here is an example of a $100,000 cash advance with a 1.3 factor rate. The total borrowing cost would come to $130,000 ($100,000 x 1.3 = $130,000).

Fixed Withdrawals

Some MCAs operate similarly to traditional business loans in that they make regular fixed withdrawals from your business bank account every day or every week. You can calculate the fixed amount based on your anticipated monthly sales and determine how long it will take to pay back the advance plus finance charges. But while the repayment term is predictable, you don’t have the flexibility to extend it if revenue slows down.

Rates and Fees for Merchant Cash Advances

If you do not understand the borrowing costs, you should take note of the fees listed in the MCA agreement and ask questions.

Typical Merchant Cash Advance Financing Costs

  • Factor rates. Factor rates from 1.1 to 1.5 may be charged by MCAs, which are multiplied by the loan amount. These are typically charged on business loans for riskier borrowers.

  • Origination fee. This fee is common to all business loans and is calculated as a percentage of the amount borrowed.

  • Underwriting or funding fee. This cost is incurred in order to examine the financing application. Depending on the financing company, it might be assessed as a fixed fee or as a percentage of the amount borrowed.

  • Administrative fee. This flat fee covers the cost of processing or maintaining the MCA agreement.

Why MCAs Are Costly

The cost of borrowing is frequently higher for merchant cash advances than for other forms of business financing like business lines of credits because they have a factor rate.

Pros and Cons of MCAs


  • High approval rates of up to 90%. For borrowers with poor credit, merchant cash advances are an accessible form of business financing. The minimum required credit score to obtain a Merchant Cash Advances is 500s.

  • Fast funding. Most MCAs are offered through online lenders, which often fund within 24 to 48 hours. At Steer Financial we are partner with over 45 lenders across the nation that facilitate these types of advances to small businesses. With our easy application process, we can help get your business a step closer.

  • No collateral needed. MCAs do not require you to back the advance with additional business collateral because future revenue serves as a guarantee for repayment to the financing lender.


  • Daily or weekly repayments. This aggressive repayment plan will be your responsibility until the advance is fully repaid.

  • Factor rate fees are frequently more expensive than traditional loans. The fees associated with an MCA can result in interest rates of up to 100% or more.

  • Doesn’t build credit. Since MCAs do not report your payments to the credit bureaus, using this financing option will not help you build better credit.

  • Not subject to loan usury laws. MCAs aren’t technically business loans, so they’re not required to abide by maximum interest rates set by each state’s usury laws.

Merchant Cash Advance Alternatives

As a last resort, merchant cash advances are effective at bridging short-term cash flow gaps. However, if your business is eligible for other business loans, you will likely pay interest and fees that are much lower than those associated with an MCA. Financing alternative include:

Term Loans

Similar to a merchant cash advance, a business term loan offers an upfront lump sum payment. Instead of tying repayments to sales, you make payments according to a set schedule regardless of your current income.

There are several types of term loans:

  • Short-term loans. The repayment schedule for short-term business loans is fixed and is typically between six and 24 months. These are frequently provided by online lenders, who have simple application processes and quick funding times.

  • Asset-based loans. Asset-based loans are secured business loans where the primary factor used to determine funding is asset value rather than cash flow. Due to this, small businesses with less-than-perfect credit but significant assets can access it more easily. Accounts receivable, inventory, equipment, real estate, and even intellectual property can be used by businesses as collateral.

  • Equipment loans. An equipment financing enables your business to pay for the acquisition, improvement, or refinancing of commercial equipment. Since the loan is secured by the equipment, it may offer interest rates as low as 5 percent, compared to 8 percent starting rates for unsecured term loans.

Business Lines of Credit

One of the simpler conventional business loan types to be approved for is business lines of credit. Most lenders have flexible eligibility requirements, requiring as little as six months of operation and a minimum credit score of 600.

Loan amounts can be between $1,000 and $250,000, giving your company a manageable amount of working capital to pay for ongoing costs.

With a business line of credit, you are given a maximum credit limit that you can always borrow against. Once you withdraw money, your repayment terms are set, but as you pay back the loan, your credit limit is increased.

Invoice Factoring

Invoice factoring is similar to merchant cash advances in that you sell a factoring company your future revenue in exchange for unpaid invoices rather than future credit card sales. You receive an advance from the factoring company equal to a portion of the total invoice amount. It then receives money from your customers, deducts fees, and gives the remaining money to your company.

You can also get a cash advance through invoice financing by using unpaid invoices. However, you, not the financing company, are in charge of collecting the payments.

Business Grants

Look into business grants if you require debt-free financing for your company. If you meet the requirements and are awarded the grant, you will receive a one-time payment of funds. The federal, state, and local governments are good places to look for grants, but some businesses and nonprofits also offer them.

Given that they are free money, grants are frequently competitive and may have particular criteria, like being a minority-owned business. To win the grant, you might need to submit a ton of documentation or even make presentations.

Steer Financial Tips:

Numerous grants are available to help entrepreneurs in underserved areas, including:

Nearly any business is eligible for a merchant cash advance, even if they have a bad credit history, and they can help when your business needs capital right away to pay for daily expenses. But its high fees and aggressive repayments may not be ideal for businesses with persistent cash flow problems.

Consider business loans made for people with bad credit if you can not get a loan from a traditional bank. These loans might have interest rates that are much lower than MCAs.

FAQs About Merchant Cash Advances

Are merchant cash advances bad?

What happens if I default on my merchant cash advance?

Can I write-off my merchant cash advance?


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