What is a merchant cash advance (MCA), and how does it work?

Merchant cash advances (MCAs) offer fast access to working capital by trading a portion of your future sales for upfront cash. Instead of borrowing money with fixed monthly payments, you're selling a slice of your upcoming credit and debit card revenue to a funding provider.

The result is quick financing, often approved and deposited in your business bank account within 24 hours, but at a steep cost. MCA factor rates can equal 25% to 350% APR once converted to annualized terms, far exceeding traditional business loans or lines of credit.

Before accepting an offer, it's essential to understand how MCA financing works, how repayment affects cash flow, and what alternatives might better fit your business needs.

What is a merchant cash advance (MCA)?

A merchant cash advance (MCA) is a business financing option that provides a lump sum of cash up front in exchange for a portion of your future credit and debit card sales. It offers quick access to cash and is typically easier to qualify for than a traditional business loan, especially if you have poor or limited credit.

Unlike traditional business loans, MCAs are predicated on the sale of future receivables rather than borrowed debt. An MCA provider purchases your future revenue at a discount, then collects repayment automatically through your daily or weekly sales.

Because MCA funding is legally a commercial transaction, it falls outside many lending regulations. This flexibility allows providers to approve applications in hours without going through a lengthy underwriting process, but it also enables them to charge far higher rates than banks or SBA lenders.

For some small business owners, that speed is worth the cost; for others, the lack of clear repayment terms and consumer protections makes MCAs one of the riskiest financing options available.

How does a merchant cash advance work?

A merchant cash advance gives your business a lump sum up front, which you repay automatically through your future sales. The provider determines your advance amount based on your average monthly credit card sales, typically offering 1–2 months of revenue.

Your repayment happens automatically through one of two collection methods, depending on your agreement and the provider's requirements:

1. Percentage holdback from card sales

The provider automatically deducts an agreed percentage (usually 10–20%) from your daily credit and debit card transactions through your payment processor. This percentage, called the holdback rate, gets withdrawn before the funds hit your bank account.

If your business processes $5,000 in card sales on Monday and you have a 15% holdback rate, the provider takes $750 that day. On slower days with only $1,000 in sales, they'd take $150.

2. Fixed ACH debits from your bank

Some providers withdraw fixed daily or weekly amounts directly from your business bank account via ACH transfer. While called "fixed," these amounts may adjust based on your revenue to prevent overdrafts during slow periods.

This method works for businesses with diverse revenue streams beyond card sales. However, it requires careful cash flow management since withdrawals happen regardless of daily sales fluctuations.

3. Typical repayment timelines

Repayment timelines vary based on your sales volume; higher sales mean faster payoff, while slower sales extend the repayment period. Most MCAs are structured for repayment within 3–18 months, though actual timelines depend entirely on your revenue.

A business with consistent high-volume sales might repay a $50,000 advance in 4 months. The same advance could take a seasonal business over a year to repay if sales drop during off-peak periods.

Merchant cash advance rates and fees

Merchant cash advances use factor rates instead of interest rates to calculate repayment, which can make the true cost difficult to compare with traditional business loans. Understanding how these rates work and the additional fees that often apply helps you evaluate the real cost of your MCA funding.

Understanding factor rates

MCA providers apply a factor rate, typically between 1.1–1.5, to your advance amount to determine your total repayment. For example, a $50,000 advance with a 1.3 factor rate equals a total payback of $65,000.

Unlike APR, which accounts for time, factor rates create a fixed repayment amount regardless of how quickly you pay. This structure means faster repayment actually increases your effective interest rate since you're paying the same fee over a shorter period.

Additional fees to watch

Many MCA providers charge extra fees that increase your total cost beyond the factor rate. These may include:

• Origination fees: Typically 2–5% of the advance amount, often deducted before you receive funds
• Processing fees: Administrative or underwriting costs for reviewing your application
• ACH program fees: Monthly charges for ACH processing
• Early payoff penalties: Added costs if you repay before the expected term
• NSF fees: Penalties for insufficient funds during a scheduled withdrawal

Always review your MCA agreement for fee disclosures and request an itemized total cost before signing.

How to calculate total payback on an MCA

Before signing an MCA agreement, you need to know what the advance will actually cost your business. Because providers use factor rates instead of interest rates, your total payback amount is fixed upfront. The key is understanding how that factor rate, your repayment schedule, and any fees interact to determine the true cost.

The table below shows you how to calculate total payback and estimate your effective APR:

Key takeaway

This simple math shows why MCAs are so expensive. Even a moderate 1.35 factor rate can translate to an effective APR of over 75%, far higher than rates on credit cards or business lines of credit. Understanding your total cost upfront helps you compare MCAs with safer financing options before committing.

Pros and cons of merchant cash advance loans

Merchant cash advances can provide near-instant funding when your business needs cash fast, but that convenience comes with steep costs and significant long-term risks.

Pros of MCAs

• Fast approval and funding: Most MCA providers review your application and deposit funds within 24–48 hours. If you need emergency capital to cover payroll or pay vendors via ACH, that speed can make a real difference.
• Flexible approval criteria: MCA providers focus on your sales volume, not your credit score, so businesses with bad credit or limited operating history still have a good chance of approval
• No collateral required: You don’t have to pledge property, equipment, or personal assets. That makes MCAs appealing to startups and small business owners without significant collateral.
• Automatic repayment from sales: Payments come directly from your credit or debit card sales, so you don’t have to worry about missed due dates or manual transfers. When sales dip, your payment automatically shrinks, too.
• Useful for short-term working capital: For businesses with steady sales but uneven cash flow, MCAs can provide quick access to working capital to handle seasonal gaps or inventory purchases.

Cons of MCAs

• Exceptionally high cost: MCA factor rates often translate to effective APRs of 25–350% or more, significantly higher than rates for business loans, lines of credit, or credit cards. That makes repayment significantly more expensive than most financing options.
• Daily or weekly repayment strain: Because providers withdraw funds frequently, MCAs can choke cash flow management, especially for businesses that rely on daily revenue to cover expenses.
• Debt cycle risk: Many businesses take out new MCAs to repay existing ones, leading to a stacking problem where multiple providers collect payments from the same sales. This cycle can consume 30–40% of your daily income and make recovery nearly impossible.
• Limited regulation and borrower protections: Since MCAs are structured as sales of future receivables, not loans, they often fall outside lending laws. Providers can include confession of judgment clauses that allow them to freeze your bank account or seize assets without court approval.
• Negative impact on future financing: Heavy MCA debt and unpredictable cash flow can hurt your ability to qualify for traditional bank loans or SBA financing later on. Lenders may view your repayment schedule as a sign of financial distress.

Key takeaway

Merchant cash advances can solve a short-term cash crunch, but the trade-off is steep. Unless your sales are highly predictable and your margins are strong enough to absorb the daily withdrawals, other financing options, such as an SBA loan or business credit card, usually offer better long-term value.

Eligibility documents and funding speed

Merchant cash advance providers streamline the application process to deliver funding quickly, often within one or two business days. You will still need to meet minimum qualifications and submit basic financial documents before approval.

1. Minimum monthly card revenue

• Most providers require at least $5,000–$10,000 in monthly credit card sales, though some work with businesses processing as little as $2,500
• Your average processing volume determines your advance amount, which typically ranges from 75–150% of your monthly card revenue
• Consistent processing history strengthens your application. Irregular or declining sales may lower your offer or result in denial

2. Time in business and credit requirements

• Most MCA providers look for at least 6–12 months of operating history
• Newer businesses can qualify, but they may face higher factor rates or smaller advance amounts until they build stronger financial records
• Credit requirements are more flexible than for traditional loans. Many providers focus more on revenue trends and sales consistency than on business credit score.

3. Required documentation

• Bank statements: Last 3–6 months of business banking activity to verify cash flow
• Credit card processing statements: Past 3–6 months to confirm sales volume and transaction frequency
• Business tax returns: Required for larger advances to assess business revenue and stability
• Identification: A driver’s license for each business owner
• Voided business check: Needed to set up ACH withdrawals
• Additional documentation: Some providers may also request profit and loss statements, business licenses, or landlord contact information

4. Typical approval and funding timeline

• Online applications take about 10–15 minutes to complete
• Most MCA providers issue an initial decision within a few hours and finalize funding within 24–48 hours after you sign the agreement
• Some companies offer same-day funding for a fee, wiring funds directly to your business bank account once they’ve verified your documents

Legal and compliance risks of MCA contracts

Merchant cash advances aren’t loans, which means they fall outside many consumer lending laws. While this allows for faster approvals, it also means fewer protections for business owners. Some MCA agreements include aggressive terms that can expose your business to legal or financial risk if you fall behind on payments.

Alternatives to business cash advance loans

Before accepting an expensive merchant cash advance, explore financing options that offer lower costs and more predictable repayment structures. These alternatives take longer to secure but can save your business thousands in fees and interest.

1. Business lines of credit

A business line of credit provides revolving access to funds you can draw from as needed, with rates typically between 7–25% APR. You pay interest only on the amount you use, and available credit replenishes as you repay.

While approval often takes 1–2 weeks, once approved, you can access working capital quickly. Many online lenders now offer lines of credit with shorter applications and fewer documentation requirements than banks.

For ongoing flexibility, this option combines the convenience of MCA funding with significantly lower long-term costs.

2. SBA working capital loans

SBA 7(a) loans and related programs provide government-backed funding at much lower rates, typically 10–15% APR, and longer repayment terms. Eligibility depends on creditworthiness, ability to repay, and U.S. business location.

The new SBA Working Capital Pilot Program offers monitored lines of credit with no upfront fees for loans up to $1 million and no annual service fees for loans under $500,000.

Although the application process requires more paperwork, the savings compared with MCA financing are substantial.

3. Revenue-based financing (RBF)

Revenue-based financing offers upfront capital in exchange for a percentage of monthly revenue until you repay a predetermined multiple of the advance. Unlike MCAs, which deduct payments daily, RBF repayments occur monthly, easing pressure on cash flow.

Total repayment caps usually range from 1.3–2x the funding amount. Because payments adjust with performance, RBF gives businesses more breathing room during slower months while maintaining predictable long-term costs.

4. Corporate cards with integrated expense management software

Many businesses turn to MCAs when cash flow visibility breaks down. Ramp helps you prevent that by combining high-limit corporate cards with automated expense management software. With real-time spending data, customizable spend limits by category or vendor, and cashback on purchases, Ramp turns expense management into a source of savings rather than stress.

Instead of paying up to 350% APR for emergency funding, you can use Ramp’s no-fee corporate cards to control spending and extend your cash runway. Accounts payable and accounting automation also eliminate manual reconciliation, freeing your finance team to focus on strategy and growth.

Make smarter spending decisions with Ramp

Taking control of your expenses today helps you avoid a cash crunch tomorrow. Ramp's finance operations platform gives your team visibility into every dollar spent so you can make faster, more informed decisions.

Instead of reacting to funding gaps after they happen, Ramp helps you prevent them. Automated expense tracking, real-time insights, and spending limits by category or vendor keep your budgets balanced and your team accountable. Every dollar goes further when you can see where it’s going and why.

Try an interactive demo and see how Ramp replaces high-cost financing with smarter expense control.