Merchant Cash Advance

How Merchant Cash Advances Work

A Merchant Cash Advance (MCA) provides an upfront lump sum that you repay through a fixed percentage of your daily or weekly sales. When sales slow down, your repayment automatically adjusts, giving you more flexibility than a traditional loan.

To determine your advance amount, the provider reviews your recent sales history—especially credit and debit card transactions. While Merchant Cash Advance offer fast access to capital, they usually come with higher costs, so it’s important to understand your cash flow and sales projections before committing.

Small Business Merchant Cash Advance Repayment Options

Small business merchant cash advances are usually repaid in one of two ways:

1. Percentage of Credit/Debit Card Sales- This is the most common repayment structure for an MCA, where your MCA provider automatically takes a daily (or weekly) percentage of your credit and debit card sales until the advance is fully repaid. Unlike traditional business loans, Merchant Cash Advances don’t have fixed repayment terms. The repayment timeline depends on your sales volume and can range anywhere from three to 18 months. Simply put, the more you sell on card, the faster you’ll pay off your advance.
2. Fixed Bank Account Withdrawals- With this approach, the revenue-based financing provider withdraws fixed amounts directly from your business bank account, usually on a daily or weekly schedule. The withdrawal amount is based on an estimate of your monthly revenue rather than your card sales. This setup offers more predictability, helping you understand exactly how long it will take to repay the advance. It’s an ideal option for businesses that don’t rely heavily on credit or debit card transactions but still want the benefits of a Merchant Cash Advance.

Comparison with Other Funding Options

 Every funding option has its own advantages and trade-offs. Knowing these differences can help you choose the best fit for your business needs. Here’s a side-by-side look at Merchant Cash Advances compared with other popular funding sources, so you can see how they stack up and decide which approach works best for your business.

💡 Pro Tip: Not all Merchant Cash Advances are the same. If you want the inside scoop on how to negotiate better terms and steer clear of the common pitfalls that other funders won’t tell you about, be sure to check out our insider’s guide to revenue-based financing.

Traditional Bank Loans

Bank loans, like SBA Loans usually come with lower interest rates than a Merchant Cash Advance. However, they often have strict qualification requirements, which can make them harder for some small businesses to access. Approval can also take several weeks—far from ideal if you need funds quickly.

Alternative Financing Solutions

Alternative financing solutions offer a variety of options that can be more accessible than traditional bank loans. Options like peer-to-peer lending, invoice financing, and crowdfunding often come with more flexible repayment terms, making them attractive for businesses that need faster access to capital.

It’s important to weigh these options carefully. While alternative financing solutions can provide funds quickly, some solutions may come with higher interest rates or less favorable terms. Consider your business’s financial health and immediate cash needs against potential long-term costs. Taking the time to evaluate all factors ensures you choose the funding option—whether it’s a Merchant Cash Advance or another alternative—that best fits your business goals.

Understanding Merchant Cash Advance Rates and Fees

Unlike traditional loans, Merchant Cash Advances don’t charge interest. Instead, providers use a factor rate, usually between 1.1 and 1.5, based on your business’s industry, financial stability, years in operation, credit card sales, and personal credit score.

Higher-risk businesses may face a higher factor rate, increasing overall fees. Remember, the factor rate doesn’t cover additional costs like administration or underwriting fees, which can add to the total cost. Knowing how these rates and fees work helps you make a smarter decision when considering a Merchant Cash Advance.

How to Calculate the Total Cost of a Business Cash Advance

To find out the total repayment amount for a Merchant Cash Advance, simply multiply the advance by the factor rate. For example, a $50,000 advance with a 1.2 factor rate means you’ll repay $60,000, which means $10,000 in fees.

For a clearer picture of your costs, convert the factor rate and any additional fees into an APR. This helps you understand the total cost of the advance and how long it will take to fully repay.

💡 Pro Tip: Before signing any offer, use our Merchant Cash Advance Calculator to see the full picture—APR, daily payments, and total repayment—so you can make sure you’re never overpaying.

Choosing a Merchant Cash Advance company

When selecting merchant cash advance companies, it’s important to consider their reputation, terms, and level of customer service. Look at how flexible they are with repayment options and whether their schedule fits your business’s cash flow. Be sure to factor in the total cost of the advance, including the factor rate, so you have a clear understanding of how much you’ll ultimately repay. Ready to find the right fit for your business? 

Key Factors to Consider

Consider the following key factors when choosing your provider:

• Reputation: Look for reviews and testimonials.
• Transparent terms: Check for clear and fair agreements.
• Customer support: Evaluate the responsiveness of the service.
• Funding speed: Determine how quickly you can receive funds.
• Liability: Avoid an MCA default, inquire if they lien the business via UCC filings or require a personal guarantee.

Recognizing these factors will lead you to a provider that suits your business needs.

💡 Pro Tip: Some funders file a blanket UCC-1 Lien on your entire business—which can restrict future financing or put your assets at risk. Always ask if the funding includes a lien, and whether it’s limited or all-encompassing.

Questions to Ask Potential MCA Companies

To increase your chances of a successful partnership, ask potential lenders detailed questions about their services and terms. It’s important to evaluate not just what they offer, but also their willingness to clarify any ambiguities.

Key factors to ask about include interest rates, repayment terms, whether they file UCC liens, and any additional closing costs. Be sure to confirm their funding timeline, especially if you need cash quickly. Don’t hesitate to dig into their funding process and track record in your industry. Addressing these points can help you avoid pitfalls and ensure you enter a transparent, beneficial agreement.

Not sure if a Merchant Cash Advance is the right fit? Check out other funding options on our business funding solutions page to explore what works best for your needs.