Merchant Cash Advances

A merchant cash advance (MCA) can be a quick fix for small business owners. MCAs can be a fit for those who need short-term financial assistance or have been denied a traditional bank loan because of poor credit scores or weak business financials. However, cash advance loans can cost you a bundle. Before you consider applying for one, make sure you fully understand the pros and cons.

See if you pre-qualify!

How merchant cash advances work

An MCA is not a loan in the traditional sense. If you take out an MCA, a financing company advances cash to you in a lump sum. They then take a percentage of your daily credit card and debit card sales, on top of charging a fee. An example from Wikipedia® outlines a sample transaction:

A business sells $25,000 of a portion of its future credit card sales for an immediate $20,000 lump sum payment from a finance company. The finance company then collects its portion (generally 15-35%) from every credit card and/or debit card sale until the entire $25,000 is collected.

Merchant cash advance application process

Getting an MCA can be easier than other types of funding to apply for with a fast online process. MCA companies review your credit card processing statements to determine if you have enough business volume. Some MCA companies ask for credit scores and bank statements, as well. Others don’t require this.

Applications for an MCA are typically online and you can get approved the same day you apply. However, buyer beware. The old adage applies here: fast cash is expensive cash.

What do merchant cash advances cost?

According to, MCAs typically range from $5,000 to $500,000, and have factor rates between 1.1x and 1.5x. Repayment is based on a holdback percentage that varies by lender, and can range from 8% to 30%.The average repayment time frame for a merchant cash advance is 8 or 9 months but the term can be as short as 4 months and as long as 18, depending on your business.

Here are costs and factors to consider:

Factor Rate: This is the total cost of the money you’re advanced. You’ll need to pay back the original sum you receive plus costs.

Holdback Percentage: If you have a high holdback percentage, the MCA provider takes more out of your daily credit card totals.

Additional Fees: You might be responsible for setup fees or advance fees that can equal 5% or more.

NerdWallet has a merchant tool to help you determine the full cost of an MCA: Merchant Cash Advance APR Calculator.

Merchant cash advance regulation

Is there any legal regulation of MCAs? The answer is, not really. Since MCA companies “purchase” your future credit card sales in exchange for upfront funds, it’s considered a “sale”, not a loan. MCA companies don’t need to follow state usury laws, regulations governing the amount of interest that can be charged on a loan.

Business restrictions

To make sure they get paid, lenders have restrictive stipulations for your business. For example, you may be prohibited from making any changes to your credit card processor until after the advance has been repaid.

Occasionally, businesses may encourage customers to pay cash in order to avoid credit card fees or giving a percentage to the MCA providers. Encouraging cash payments, by offering discounts for example, could be restricted by merchant cash advance lenders.


Pros and cons

Before you jump online and apply, it’s important to be aware of the pros and cons. Here’s a list to review.


  • Easy application process
    No need to prepare a business plan or gather a pile of documents. Most MCA providers initially require only the business owner’s social security number, a business tax ID, and general business information. Once you move forward in the application process, you might need to produce 2+ months of credit card processing data, 2+ months of business bank statements, and evidence of 2+ years accepting credit cards.
  • Qualifying is Easy
    Unlike bank loans, it’s easy to qualify even if you have low credit scores.
  • Fast turnaround
    Approval usually happens within 24 hours. You’ll know the amount of funds you qualify for, the factor rate, and the holdback percentage.


  • High costs
    APRs can be in the in the triple digits. It’s one of the most expensive options for small business owners in need of capital.
  • Payment isn’t steady
    MCA payback is through daily credit card sales that can fluctuate. This makes cash flow management challenging.
  • You can get caught in a debt cycle
    The funds from an MCA can get you over the hump but the high costs can quash any plans you have for growth. You may even need to take out and MCA over and over to keep from defaulting.
  • Daily payments can crunch your cash flow
    SmartBiz® customer Terry Trumbull, owner of Terry Trumbull Meats, had self-financed his business for years but looked to alternative sources for funds. He ended up taking out a short term loan that required daily payments 25 days a month. “That really hurt my cash flow and it wasn’t helpful in reaching my overall financial goals” he said.
    Matt McClean, another customer and owner of Wicked Chicken restaurant, came to SmartBiz for a better solution to daily payments. “Before I found SmartBiz, I took out what I call a ‘mafia loan’. It cost a ridiculous amount of money and required daily payments…so I started looking for a loan with a better rate.”
    Both customers explored the alternatives and qualified for a low-cost SBA loan from a SmartBiz Loans® marketplace bank with a 10-year term and low monthly payments.

Alternatives to MCAs

If you need additional funds to meet business goals, there are other options to explore if you have decent credit and solid business financials. Be sure to review customer feedback before you start working with a lenders. Look for reviews from small business owners who have worked with the company you’re considering.

Business Line of Credit

A business line of credit is a revolving line you can draw against as you need it. You only pay for the money that you use. Lines of credit can be extended by a large bank, a small local bank, or an alternative online lender. The use of funds is flexible, there are no set monthly payments, and no interest is charged on the unused money in the account. When you repay a borrowed amount, those funds are immediately available again.

Cash Advance

A cash advance is a type of short-term, cash loan available through your credit card provider. You can use your credit card to withdraw cash at a bank or ATM, but the amount has to be paid back with interest. This might be convenient when you need fast cash, but like MCA’s, it’s expensive.

Small Business Administration Loans

An SBA loan is a government-guaranteed small business loan that has a long-term and low-interest rates. The Small Business Administration (SBA) is the government agency that partially guarantees SBA loans, making them more attractive to lenders.

SBA loans come with different rates depending on the lender you work with. The SBA establishes the maximum amount that can be charged for these loans. There are several fees associated with SBA loans. However, even after fees, SBA loans are vastly more affordable than the majority of alternative financing and alternative lender options.

To learn if your business is in good shape to qualify for an SBA loan, sign up for the free SmartBiz Advisor® tool. SmartBiz Advisor helps you learn how banks typically evaluate your business and recommends ways to help you increase your credit and financial health so you have a better chance of successfully applying for funding when you need it. Learn more here: SBA Loan Help: What is SmartBiz Advisor?

Bank Term Loans

A term loan is a common way to fund a small business. In short, borrowers get a lump sum upfront then repay with interest over a specific period. A standard term loan is paid back over the course of one to five years. These types of loans for small businesses are offered by traditional banks, credit unions, and online lenders and can be a good option for businesses expansion and those who need funds faster than other loan products can provide. SmartBiz works with banks in our marketplace to facilitate bank term loans.

Visit the SmartBiz Loans website to learn about this funding option: Bank Term Loans.

Qualifying for the lowest cost funds

If you need funds for working capital, to refinance high interest debt, or other business building initiatives, explore your options before settling on an MCA. Financial experts caution that an MCA can do more harm than good.

Your best bet to qualify for low-cost funds with long terms is to maintain a strong credit score. Both your personal and business credit score will be reviewed by lenders to asses risk.

The SmartBiz Small Business Blog has lots of resources to help you understand and improve your scores. Review this article for information about the importance of high scores and how you can manage yours: How Small Business Owners Can Improve Their Credit Scores.