October 31, 2022
min read

What Is Merchant Cash Advances? How Does It Work?

Merchant cash advances are a great option if you're having trouble getting financing for your business. Learn more about these loans and how they work.
What Is Merchant Cash Advances? How Does It Work?What Is Merchant Cash Advances? How Does It Work?

An infusion of cash is always welcome in a small-to-medium-sized business. Sometimes, available cash is limited for a period of time, but you need money now to operate or make an investment in future sales. One way to get some money quickly is through a Merchant Cash Advance, an alternative way to finance your small business. An MCA can offer flexible terms that allow you to repay the loan over time.

What are Merchant Cash Advances?

Merchant cash advances are short-term loans from a lender, which are different from standard bank loans. An MCA can be used if you can't get a loan for a short-term project or inventory to sell (like a build-up for the holiday shopping season) due to a cash-flow shortage.

The lender can use your business credit card receipts to determine how much cash you need and how much you can pay back. The idea is that you will pay the lender back when your end customer has paid you.

You sign a contract with the MCA lender. This contract spells out how much money you're receiving, the interest rate, and when and how you will pay them back.

Interest rates for MCAs differ quite a bit. Interest rates can depend on where you are located, who is lending you the money, and your history of paying back loans and credit card bills. In the U.S., some states place limits on what interest rates can be charged for an MCA. A typical MCA rate is based on the following:

  • Years your business has been operating
  • What industry you're in
  • Your business financial records
  • Credit card transactions
  • Your credit score

Why Do You Need Them?

MCAs are never the first choice when it comes to financing your business. Traditional business loans are better for long-term business needs and have lower rates. MCAs are helpful when you need extra funds for unexpected expenses, like replacing equipment or a needed repair. Or you may need a short-term loan to bring in inventory for your busiest season.

MCAs are expensive and require you to pay them back quickly. The fees and payment schedule are worked out in advance and written into the contract. The MCA lender provides you with a lump sum of cash, and you will pay them back through future sales. MCA payments are traditionally paid in one of two ways:

1. Percentage of credit card receipts

This is the most common way an MCA is set up. The lender deducts a daily or weekly amount of money dependent on your sales. This is automatically deducted from your account. These loans are paid back in anywhere from 30 days to 18 months. Higher sales numbers mean that you pay back the lender more quickly.

2. Fixed withdrawals from a business bank account

An MCA lender can withdraw your payments from your business bank account. This is usually done when you have agreed to fixed payment amounts instead of percentage payments. These payments are made without regard to how much you earn through sales. This payment amount is determined based on your monthly revenue.

This payment structure gives you the advantage of knowing how much you'll pay and when your payments will be complete. This method of repayment may be better for businesses that are paid in cash or don't receive most payments through credit card sales.

How Much Can You Afford?

This varies from company to company, but taking this question seriously is essential. Since your monthly sales volume traditionally determines a merchant cash advance, the amount of money you receive is equal to one month's sales. To get started, you need to look at your monthly sales receipts to calculate how much your MCA lump sum would be and whether you can afford to borrow it.

An MCA works best for your small business when it needs extra money to become more functional and competitive. Some small businesses can't obtain a bank loan.

If you're looking for cash to restart business operations due to being shut down due to weather or another disaster, an MCA isn't right for you. Since an MCA structure requires immediate daily or weekly payment, your better option is a bank loan because you don't have to pay it back immediately.

How Long Will They Last?

While you can usually get your funds within 24 hours, merchant cash advance loans could potentially need to be repaid in as little as 30 days. When you work with a lender, they will give you the repayment and fee schedule. You must repay as contracted to retain your access to the cash advance. You'll also be required to pay it back before you can apply for another MCA.

When Should You Apply?

The answer to this question is variable for any business. Here are some factors to consider before applying:

  • Are you eligible to apply for an MCA?
  • How much money do you need right now?
  • What interest rate would you be charged?
  • Would the lender need collateral? (Usually not.)
  • Can you realistically repay the lender in the time required?

Once you've gathered all data regarding the MCA, you should think carefully about whether this is the right solution for your need and situation. Small businesses that get a reliable amount of sales each day can feel confident that you can pay it back quickly. And it's important to consider how quickly the cash-flow shortage you're in will be resolved.

When you've calculated everything, you're ready to go ahead and apply. Whenever you decide to apply will be the best time for your business. This is something you determine.

Pros and Cons of a Merchant Cash Advance


  • Fast to fund. Apply online and get approved within 24 hours. There is minimal documentation needed to get started.
  • Requirements are flexible. MCAs can be created for any business, even with bad credit history. You don't require collateral, so this can work for you if you're a startup. Just remember your credit history will affect the fees you have to pay.
  • Repayment is based on actual sales. That allows your payments to adjust depending on your daily sales instead of a fixed amount.


  • MCAs are expensive. If you compare an MCA to a business loan, you will have to pay higher fees. An MCA is one of the most expensive types of financing for your business. Some APRs can be as high as 350%, depending on several factors, like the amount you need to borrow and the time you need to repay it.
  • Daily or weekly repayment schedule. Payments are deducted daily or weekly from your account as contracted, impacting your cash flow. This can cause a cycle of debt that is hard to break out of. If you need an MCA to pay another MCA, there are better choices for you.
  • Paying early won't save you money. Unlike a traditional business loan, your fees are fixed for an MCA.
  • Contracts may be confusing. Since MCAs are based on factor rates, they usually don't list APRs in their contracts. Some U.S. states require more transparency due to new regulations, but historically MCA contracts could be more straightforward.
  • No federal regulation. Traditional loans are subject to federal banking regulations. MCAs aren't structured as business loans that are required to comply with banking regulations. Instead, they are regulated by the Uniform Commercial Code in each state. This can result in predatory lenders that offer misleading marketing or sales practices and immediate approvals and funds.

Are MCAs right for your business?

You are the only person who can answer this question. Be honest about your financial situation, need for immediate cash, and ability to pay it back. While quick access to funds can look appealing, a merchant cash advance is only helpful if you can realistically pay it back on time. If you can't, you will have to find an alternative solution.

Examine your need and all the alternative funding options. Then if you think an MCA is what you need, get started with the application.

By Darryl Sykes CEO of

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