Merchant Cash Advance (MCA): What is it and how does it work?
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A merchant cash advance (MCA) is a type of financing that provides a business with a lump sum of cash in exchange for a percentage of future credit card sales. Repayment is made through automatic daily or weekly deductions from the business’s credit card sales.
These advances can provide quick access to cash, but they often come with high costs and fees.
Important: MCAs are not technically loans. They’re structured as purchases of future receivables, which means:
- Not subject to traditional lending regulations
- State usury laws (interest rate caps) don’t apply
- Less consumer protection than traditional loans
- Largely unregulated
This legal distinction allows MCA providers to charge significantly higher costs than traditional lenders.
How do merchant cash advance loans work?
A merchant cash advance (MCA) loan works by providing a business with a lump sum of cash in exchange for a percentage of the business’s future credit card sales.
The lender will typically provide the business with a cash advance of a certain amount, and in return, the business agrees to repay the lender a certain percentage of their daily or weekly credit card sales until the loan is fully repaid. The repayment percentage and the length of time for repayment are usually determined by the lender based on the creditworthiness and cash flow of the business.
The lender will usually require the business to provide daily or weekly credit card sales data, and will automatically deduct the agreed-upon percentage from the business’s credit card sales until the loan is fully repaid. This type of loan is often used as a short-term solution for businesses that need quick access to cash.
It’s worth noting that MCAs have a high cost of capital as compared to traditional loans, therefore businesses should consider all their options before getting into this type of funding and also make sure to read the contract thoroughly.
Two repayment methods explained
Method 1: Percentage of Card Sales (Most Common)
- Provider automatically deducts a fixed percentage (typically 10-20%) of daily credit card and debit card sales
- Called the “holdback rate” or “retrieval rate”
- Repayment fluctuates with sales volume: higher sales = faster repayment, lower sales = slower repayment
Method 2: Fixed Daily/Weekly ACH Withdrawals
- Predetermined amount withdrawn from business bank account
- Based on estimated monthly revenue
- Provides a predictable repayment timeline
- Better for businesses without heavy card sales
- Less flexibility during slow periods
Understanding factor rates
Unlike traditional loans that use interest rates (APR), merchant cash advances use factor rates to determine total cost. A factor rate is a decimal number (typically 1.1 to 1.5) multiplied by your advance amount.
How to calculate factor rates
Formula:
Total Repayment = Advance Amount × Factor Rate
Cost of Advance = Total Repayment – Advance Amount
APR Calculation Formula:
APR = (Cost of Advance ÷ Advance Amount) ÷ Days to Repay × 365 × 100
Advance Amount | Factor Rate | Total Repayment | Cost | Percentage Cost |
$10,000 | 1.10 | $11,000 | $1,000 | 10% |
$10,000 | 1.30 | $13,000 | $3,000 | 30% |
$10,000 | 1.50 | $15,000 | $5,000 | 50% |
$50,000 | 1.25 | $62,500 | $12,500 | 25% |
What are the requirements for a merchant cash advance (MCA)?
The requirements for a merchant cash advance (MCA) loan can vary depending on the lender, but generally, businesses will need to meet the following criteria:
- Minimum Monthly Credit Card Sales: Most lenders will require the business to have a minimum level of monthly credit card sales, typically around $5,000 – $10,000, to qualify for an MCA loan.
- Time in Business: Most lenders will require the business to have been in operation for a minimum period of time, typically around 6-12 months, to qualify for an MCA loan.
- Credit Score: Many lenders will check the credit score of the business owner(s) and may have a minimum credit score requirement, typically around 550-600
- Bank Statements: Lenders will often request to see the business’s bank statements to assess the business’s cash flow and ability to repay the loan.
- Collateral: Many MCA lenders do not require collateral, but some may ask for it as a security.
- Business Type: Some lenders may specialize in certain types of businesses or industries and may have specific requirements or restrictions for those businesses.
Requirement | Typical Minimum | Preferred |
Time in Business | 3 to 6 months | 12+ months |
Monthly Revenue | $5,000 to $10,000 | $20,000+ |
Credit Score | 500 to 550 | 600+ |
Annual Revenue | $60,000+ | $150,000+ |
Bank Account | Active checking account | Account open for 3+ months |
Documents Typically Required
- Last 3-6 months of business bank statements
- Credit card processing statements (last 3-6 months)
- Driver’s license or government-issued ID
- Voided business check (for ACH setup)
- Business tax returns (for larger advances)
- Proof of business registration (EIN, Articles of Incorporation)
It’s also worth noting that many MCA lenders are willing to work with businesses that may not qualify for traditional bank loans and may have more lenient requirements.
However, it’s important for businesses to read the contract thoroughly, understand the fees and interest rates, and compare offers from different lenders before taking the loan.
What is the difference between a loan and a merchant cash advance?
A loan and a merchant cash advance (MCA) are both types of financing that can be used by businesses to access cash, but they have some key differences.
Repayment: The main difference between a loan and an MCA is the way they are repaid. With a loan, the borrower repays a fixed amount of money, including interest, over a set period of time (usually months or years), with a set payment schedule. With an MCA, the borrower repays a percentage of their daily or weekly credit card sales until the advance is fully repaid.
Collateral: A traditional loan usually requires some form of collateral, such as property or equipment, to secure the loan. An MCA, on the other hand, typically does not require collateral, but can still be considered a high-risk loan by the lender.
Credit Score: A traditional loan will consider the creditworthiness of the borrower and require a good credit score. An MCA may not be as strict on credit score requirements but will consider the cash flow and credit card sales of the business.
Interest Rates: The interest rates on a traditional loan are generally lower than those on an MCA, which can be considered a high-cost form of financing.
Approval and Funding: A traditional loan can take a longer time for approval and funding, whereas an MCA can be approved and funded relatively quickly.
Businesses should consider all their options before getting into any type of funding and also make sure to read the contract thoroughly and compare offers from different lenders. Additionally, it’s important to consider the cost of capital and the impact on the business cash flow when making a decision on which type of financing to pursue.
Feature
Merchant Cash Advance
Traditional Loan
Legal Structure
Purchase of future receivables
Borrowed funds
Repayment
Percentage of daily sales or fixed daily ACH withdrawals
Fixed monthly payments
Cost
25% to 350%+ APR equivalent
5% to 30% APR
Approval Speed
24 to 72 hours
Several days to weeks
Credit Requirements
Flexible, scores around 500+
Stricter, usually 650+ preferred
Collateral
Usually not required
Often required
Term Length
3 to 18 months
1 to 10+ years
Early Payoff Benefit
No savings due to fixed factor rate
Early payoff reduces interest cost
Credit Reporting
Not reported unless default occurs
On time payments help build credit
Looking for a business loan?
What is required to qualify for a business credit card?
To qualify for a business credit card, you typically need to meet certain eligibility criteria set by the credit card issuer. Here are some of the most common requirements in no particular order:
Business entity: You need to have a registered business entity, such as a corporation, sole proprietorship, partnership, or LLC.
Business credit history: You may need to have an established business credit history, which can be established by opening accounts with vendors, suppliers, and lenders and paying bills on time.
Personal credit history: Your personal credit history may also be considered when applying for a business credit card, as the issuer may want to assess your ability to manage credit and make payments on time.
Revenue: You may need to have a minimum annual revenue or sales to qualify for some business credit cards.
Documentation: You may need to provide documentation to prove your business entity, such as articles of incorporation, business license, or tax ID number.
Ownership and responsibility: You may need to be an owner or authorized representative of the business and be responsible for the card and its use.
It’s important to note that requirements for business credit cards may vary by issuer and by the specific card, so it’s a good idea to review the eligibility criteria carefully before applying.
Do merchant cash advances hurt your credit score?
A merchant cash advance (MCA) itself may not directly hurt your credit score, as the lender does not report the loan to the credit bureaus. However, if a business defaults on the MCA, the lender may turn the debt over to a collection agency, which will report the delinquency to the credit bureaus. This can have a negative impact on the credit score of the business owner(s).
Additionally, if a business takes on too much MCA debt and is unable to make the daily or weekly repayments, it can put a strain on the cash flow and potentially lead to defaulting on other loans or bills which can also have a negative impact on credit score.
It’s important for businesses to consider all the options available to them and understand the terms and conditions of the MCA before taking one on, so they can make an informed decision and understand the potential consequences.
Indirect Ways MCAs Hurt Credit:
- Cash flow strain – Daily deductions make it hard to pay other bills on time
- UCC liens – Show up on business credit reports, signal financial distress
- Stacking – Multiple MCAs can consume 30-50% of revenue, leading to defaults
- Prevents traditional financing – Traditional lenders avoid businesses with MCA debt
Pros and cons of the merchant cash advance loan
This by no means is an exhaustive list, but talking to hundreds of businesses here are some of the most common advantages and disadvantages to consider when looking at getting a merchant cash advance:
Advantages of a merchant cash advance (MCA) include:
- Quick and easy access to cash: MCAs can be approved and funded relatively quickly, making them a good option for businesses that need cash quickly.
- No collateral required: Many MCA lenders do not require collateral, making them accessible to businesses that may not have assets to use as collateral.
- Flexible repayment: The repayment is based on a percentage of daily or weekly credit card sales, which can be beneficial for businesses that have fluctuating sales.
- No fixed repayment schedule: With an MCA, there is no fixed repayment schedule. The business repays the advance as a percentage of their daily or weekly credit card sales until the advance is fully repaid.
Disadvantages of a merchant cash advance (MCA) include:
- High cost of capital: MCAs often come with high interest rates and fees, making them a more expensive form of financing compared to traditional loans.
- Short-term solution: MCAs are typically short-term solutions and may not provide enough funding for long-term business needs.
- Daily or Weekly deductions: The automatic daily or weekly deductions from credit card sales can put a strain on the business’s cash flow.
- Risk of default: If a business is unable to make the daily or weekly repayments, they may default on the advance, which can lead to legal action and damage to the business’s credit.
It’s important for businesses to consider all their options before getting into an MCA and also make sure to read the contract thoroughly, understand the fees and interest rates, and compare offers from different lenders before taking the loan.
Additionally, it’s important to consider the impact on the business cash flow when making a decision on which type of financing to pursue.
Looking for a business loan?
When should businesses consider a merchant cash advance vs other kinds of loans?
Businesses should consider a merchant cash advance (MCA) when they need quick access to cash and they have a steady stream of credit card sales.
MCAs can be approved and funded relatively quickly, making them a good option for businesses that need cash quickly and have difficulty qualifying for traditional bank loans.
Here are a few situations when a MCA might be a good option for a business:
- Short-term needs: MCAs are typically short-term solutions, so if a business has a specific need that can be met with a lump sum of cash and they can afford the daily or weekly repayment, then an MCA can be a good option.
- Seasonal business: Businesses that have seasonal sales patterns, such as retail stores or restaurants, may find that an MCA is a good option as the repayment is based on a percentage of daily or weekly credit card sales, so the business can pay more when sales are high and less when sales are low.
- No collateral: If a business does not have assets that can be used as collateral for a traditional loan, an MCA may be a good option as many MCA lenders do not require collateral.
- Bad credit: If a business has bad credit, an MCA may be a good option as many MCA lenders may not be as strict on credit score requirements as traditional lenders.
However, it’s important to note that MCAs come with high interest rates and fees and can put a strain on the business’s cash flow.
Businesses should carefully consider the terms and conditions of the MCA and compare offers from different lenders before taking on this type of financing. Additionally, they should weigh the cost of capital and the impact on their cash flow when making a decision on which type of financing to pursue.
Consider an MCA ONLY when ALL of these are true:
- You need funds within 24-72 hours
- Traditional banks have rejected your application
- You have strong credit card sales ($10,000+/month)
- You have a short-term emergency or opportunity
- You can afford 10-20% revenue deduction daily
- You understand and accept the high cost (80%+ APR)
Avoid MCAs if:
- You can wait 2-4 weeks for funding
- You qualify for traditional financing
- Your profit margins are already tight (<20%)
- You already have one or more MCAs
- You need funds for long-term investments
Using loans the best way possible can help your business grow by providing you with the necessary capital to invest in expansion, equipment, inventory, or other resources.
When your business has the opportunity to increase production, hire more employees, enter new markets, and improve operations—your business can thrive.
Additionally, loans can also be used to manage cash flow and smooth out any financial fluctuations which are common during recessions or any unexpected market changes. Using capital properly assists your businesses to continue to operate smoothly even during tough times and use loaned funds to take advantage of new opportunities as they arise.
Using a MCA's vs a term loan?
Using Merchant Cash Advances and a business term loan serves different purposes and can have different advantages and disadvantages depending on your business’s needs and financial situation.
Primarily, Merchant Cash Advances give business owners quick and easy access to cash: MCAs can be approved and funded relatively quickly, making them a good option for businesses that need cash quickly.
A term loan, on the other hand, is a lump sum of money that is borrowed and repaid over a set period of time, typically with a fixed interest rate.
Term loans are often used for larger expenses such as equipment purchases, inventory, or real estate, and can be useful for financing long-term growth or investment opportunities.
Term loans tend to have lower interest rates than MCA loans but require a more extensive application process, and collateral may be required to secure the loan.
To learn more about Business Term Loans, visit our accompanying post: Understanding Business Term Loans and How They Can Help Your Business.
Find the right financing solution for your business with Levr.ai
Hopefully, you’ve enjoyed our comprehensive overview of Merchant Cash Advances.
Levr.ai can help take the pain out of finding the RIGHT financing option for your business to get what it needs fast, and keeps your business growing.
There is a lot of information available on the subject, but at Levr.ai we thought it would be refreshing to provide you with tips & tricks without a commissionable link influencing information considered throughout this post.
We encourage you to review the other kinds of lending options available and see if perhaps one of those is more suitable for your business than a Merchant Cash Advance (MCA).
To learn more about Levr.ai and business financing options in the free loans marketplace, create a free account today.
Frequently asked questions about MCA loans
What happens if I can’t make my MCA payments?
The provider can pursue legal action, freeze your bank accounts, seize business assets through their UCC lien, and go after your personal assets if you signed a personal guarantee. Contact your provider immediately if you’re struggling—some may restructure for additional fees.
Can I pay off an MCA early to save money?
No. The factor rate creates a fixed total repayment amount. Whether you pay back in 3 months or 12 months, you owe the same total amount. Paying faster actually increases your effective APR, and some providers charge 5-15% early payoff penalties.
How long does it take to get MCA funding?
24-72 hours from application to cash in your account, typically 1-3 business days total if you have all documents ready.
Can I get an MCA without credit card sales?
Yes, through ACH-based MCAs with fixed daily/weekly bank withdrawals. You’ll need higher monthly revenue ($15,000-$25,000+) and 6-12 months of bank statements showing consistent deposits.
What is “stacking” MCAs and why is it dangerous?
Taking multiple MCAs simultaneously from different providers. Each one adds to your daily repayment—three MCAs could consume 40-50% of your daily revenue, creating a debt spiral. 67% of businesses with 3+ stacked MCAs fail within 18 months.
How can I tell if I’m getting a fair factor rate?
Factor rates typically range 1.10-1.50. Fair rates by profile:
- Strong credit (680+), $50K+ revenue: 1.10-1.20
- Average credit (600-680), $25K+ revenue: 1.20-1.30
- Fair credit (550-600), $15K+ revenue: 1.30-1.40
Anything above 1.50 is a red flag. Get 3-5 quotes to compare.
- What contract terms should I watch out for?
Never sign:
- Confession of Judgment (lets them seize assets without court)
- Automatic renewal clauses
- Lockbox arrangements (they control your payments)
Review carefully:
- Personal guarantee
- Default triggers
- Attorney fees clauses
- Reconciliation provisions
Have an attorney review before signing.
Can I negotiate MCA terms?
Yes. Most negotiable: factor rate (reduce by 0.05-0.15 points), holdback percentage, personal guarantee, and advance amount. Get quotes from 3-5 providers and use them as leverage. Providers will often match or beat competitors.
