Cash Flow Solutions

What is a Merchant Cash Advance? How Does It Work?

Some businesses have plenty of cash flow to succeed and grow. Others need additional cash to manage their operations, achieve or sustain profitability, or expand into new markets. One way to obtain funding for these or other purposes is to use a merchant cash advance (MCA). 

Merchant cash advance definition 

MCAs offer small businesses quick access to cash as an alternative to a traditional small business loan or line of credit. 

Using an MCA, a business can turn a percentage of its future credit card sales receipts into an immediate lump sum. For example, an MCA provider might loan a small business $50,000. The business would then repay the amount with automatic payments of 10% of the business’ daily credit-card receipts. The payments would continue until the business has paid the full amount of the advance and various fees. 

What is the difference between a loan and a merchant cash advance? 

Small business loans and MCAs both provide funds for small businesses, but these two types of financing have very different repayment structures. Loans are repaid in fixed, monthly installments, typically comprised of principal and interest. MCAs are repaid from sales receipts at the time of sale. 

How do merchant cash advances work? 

An MCA is similar to a conventional small business loan in that a business receives a lump sum and must repay it. Though the payment structure for MCAs are not as regulated as a typical loan, they do have interest rates and contracts.  

Here are some other details about MCAs: 

Approval process 

Any business that has been operating for at least a few months and has received at least a few thousand dollars in average monthly credit card sales can qualify for an MCA. Companies with impaired credit may also be eligible for this type of financing. 

Speed of funding 

Online lenders can often approve MCAs quickly. Business owners who need funds immediately should ask their lender about the timeline for approval and cash disbursement. 

Factor rates 

MCAs aren’t loans, so they don’t have interest rates or annual percentage rates (APRs). Instead, they have what’s known as a “factor rate.” A factor rate is a fee that’s based on the amount of the cash advance. 

Lenders typically don’t publish their factor rates, but they usually range from 1.1 to 1.5. The rate an individual business will pay for a cash advance depends on the lender’s assessment of the business’ operations and its ability to repay the advance and the fees. 


MCAs can charge other fees in addition to the factor rate. Examples include setup fees, processing fees, payment fees, and administrative fees. 


MCAs are subject to less government regulation than traditional small business loans. The lack of oversight can make MCAs riskier for small businesses. Business owners should read their MCA contract carefully and make sure they understand terms, like the factor rates. 

Merchant cash advance requirements 

Business owners might apply for an MCA because they have a low credit score and won’t qualify for traditional financing options. 

The requirements to obtain an MCA typically include: 

  • Being an established business 
  • Maintaining an open account with a qualified credit card processor 
  • Having a history of credit card transactions that’s deemed sufficient to repay a cash advance through a percentage of future sales 

Advantages of a merchant cash advance 

MCAs offer a number of advantages, including flexible guidelines to qualify and, if approved, fast, easy access to cash. 

Get cash fast 

One of the biggest benefits for small or online businesses considering MCAs is getting cash quickly. Some businesses can receive cash within hours of submitting an online application. This is good news for business owners who don’t have the time to wait during the long approval process that’s typical with many banks and larger lenders. 

Little-to-no paperwork 

Applying for an MCA online eliminates the need to complete a lot of paperwork that needs to be faxed, scanned, or mailed to the lender. Online applications make approvals speedier, too. 

No fixed monthly payment 

Businesses that experience uncertain, variable, or seasonal sales patterns may prefer MCAs to traditional business loans because MCA repayments correspond to sales receipts rather than a fixed monthly amount. 

Favorable approval rates 

Businesses that have been rejected for traditional loans by banks or other lenders may still get approved for an MCA. 

Perfect credit isn’t required 

Since MCA approvals mainly take into account prior credit card receipts, good credit generally isn’t a requirement for approval. Business owners with bad credit or relatively low credit scores may still qualify for an MCA. 

No collateral required 

Since MCAs are repaid from future credit card receipts, physical collateral, such as a personal home, typically isn’t required. Businesses with strong credit card sales may get approved even if they don’t have a lot of other assets. 

Disadvantages of a merchant cash advance 

MCAs also come with some disadvantages, including high costs and limited government oversight. 

High costs 

Fees for MCAs can range significantly higher than for a traditional business loan or line of credit. 

For example, a $50,000 MCA with a factor rate of 1.5 would result in a repayment of $75,000, plus any other fees. The $25,000 fee equates to an effective interest rate of 50%. 

In some cases, fees for an MCA can be more than the total amount of the cash advance.  

Little-to-no regulatory oversight 

MCAs generally aren’t as heavily regulated as a conventional small business loan or line of credit because their repayment terms are tied to future credit card sales.  

No fixed repayment term 

Unlike a small business loan, an MCA doesn’t have a set repayment term. Instead, the repayment schedule depends on the amount of the cash advance, the factor rate, and the business’ credit card receipts. 

How to get a merchant cash advance 

Here are three steps to apply for an MCA: 

  1. Open an account with a qualified credit card processor.

Since an MCA is funded based on the business’ ability to repay the cash advance with a percentage of credit card receipts, the business must have an active account with a credit card processor. The latter must be contracted with the company that provides the cash advance. 

  1. Complete and submit an application.

Applying for an MCA is a fairly straightforward process that typically includes a streamlined application and simplified paperwork. Businesses typically start and complete an application online.  

  1. Read and sign the contract.

An MCA contract usually specifies that the business: 

  • Agrees to sell a percentage of its future credit card receipts at a discount in exchange for an immediate cash advance 
  • Agrees to provide a portion of its daily credit card sales to the funding company as repayment for the cash advance 
  • Will be subject to financial penalties if it defaults on the terms of the contract 

Business owners should read their MCA contract carefully since it dictates the terms and conditions of the MCA, including the factor rate and other fees, as well as penalties for nonpayment. 

Are merchant cash advances right for my business? 

MCAs may make sense for business owners who need to improve their cash flow, aren’t able to qualify for a traditional small business loan or line of credit and have a stream of credit card receipts they’re willing to use for repayment. Depending on their circumstances, businesses may wish to consider other types of financing, such as a line of credit, as an alternative to an MCA. 

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