What is a merchant cash advance (MCA) and is it right for your business?

A merchant cash advance (also known as an MCA or cash float) can be a useful way for cash-strapped businesses with few financing options to get the money they need.

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The concept is simple: Lenders grant you money now in exchange for a portion of your future sales. However, an MCA’s accessibility comes with a steep cost, so it’s important to know what they’re best used for—and when to avoid them entirely.

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If you’re in search of quick cash for your business, read on to learn how merchant cash advances work, the advantages and disadvantages of using them, plus where and how to get one.

What is a merchant cash advance?

A merchant cash advance is an alternative financing method often used by small businesses without access to traditional bank loans or lines of credit.

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The business receives a lump sum payment in exchange for a percentage of its future credit card and debit card sales. Over a period of months, the lender then takes revenue from the business’s card transactions to recoup the money.

How do merchant cash advances work?

As mentioned above, merchant cash advance providers take a portion of your future sales as repayment for your principal balance plus fees.

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Compared to traditional business funding options, where interest is determined by your interest rate, merchant cash advance fees are based on your factor rate. You can multiply this number—which typically ranges from 1.1 to 1.5, depending on your qualifications—by your advance amount to calculate your total interest.

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For example, let’s say a lender approves you for a $10,000 advance with a factor rate of 1.5. This means that, for every dollar you borrow, you’d pay the lender $1.50.

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To calculate your interest, multiply the amount you borrow by the factor rate. Then subtract your borrowing amount from the total.

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$10,000 x 1.5 = $15,000

$15,000 - $10,000 = $5,000

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In this example, you’d pay an additional $5,000 in interest for your business cash advance.

This number may not reflect your total amount owed, however. In addition to the factor rate, some lenders also tack on origination fees and other administrative costs—further increasing your total balance.

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How are payments on a merchant cash advance made?

MCA repayment is structured in one of two ways:

Percentage of card transactions

This method is the most common one used by merchant cash advance companies. A provider will automatically deduct the agreed-upon payment amount (known as the holdback percentage—this is typically between 10% and 20% of your daily credit card sales) directly from your merchant account until the balance is repaid.

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Here, the amount withdrawn by the lender depends on your credit card sales volume. The more sales you make, the faster your advance is paid off.

ACH withdrawals

In this method, the lender takes a fixed amount from your business bank account on a daily or weekly basis—sort of like a term loan, just on a much faster repayment schedule. Because repayments are fixed, lenders don’t need to know your sales volume. The amount is determined by your estimated monthly revenue instead.

Merchant cash advance loan example

Here’s another example of a merchant cash advance (MCA) with both payment options:

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Let’s say a business needs $20,000 to cover a short-term expense and doesn’t qualify for a traditional loan. The business decides to take out a merchant cash advance with a factor rate of 1.4. This means the total repayment amount will be:

$20,000 x 1.4 = $28,000

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The business will owe the lender $28,000, including the original advance and fees.

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Repayment Option 1: Percentage of Card Transactions

The lender agrees to take 15% of the business’s daily credit card sales (the holdback percentage). If the business processes $1,000 in credit card sales in one day, the lender will deduct $150 (15% of $1,000). On days when the business makes higher sales, the repayment speeds up, but on slower days, the payments decrease. This method allows for flexible repayment based on sales volume.

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For instance, over time, if the business averages $1,000 in daily card sales, the lender would collect $150 each day. At this rate, the advance would be repaid in approximately:

$28,000 ÷ $150 = 187 days (about 6 months)

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Repayment Option 2: ACH Withdrawals

Alternatively, the lender could set up ACH withdrawals, deducting a fixed amount of $300 from the business’s bank account every day, regardless of sales volume. With this method, the business would know exactly how much is coming out daily, but it wouldn’t benefit from lower payments during slow periods. In this case, the business would repay the MCA in:

$28,000 ÷ $300 = 93 days (just over 3 months)

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With this example, you can see how both repayment options—percentage of card transactions and ACH withdrawals—offer different levels of flexibility and predictability.

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Benefits and drawbacks of merchant cash advances for small businesses

Pro: Fast, accessible funding

A merchant cash advance is great if you need money now and don’t have many other options to rely on.

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An online application combined with a quick turnaround time makes this method particularly attractive to small business owners. With some lenders, approval can take less than 24 hours and funding about 3 business days or less.

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And because they’re considered a cash advance instead of a loan, they’re not subject to the same stringent regulations as traditional loan products.

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You don’t need a high credit score or collateral to qualify, for instance. MCA lenders are more concerned with your monthly revenue and credit card processing statements than whether you have bad credit—although they’re still more likely to give you a lower factor rate if you have a strong financial profile.

Pro: Flexible repayment terms

Repayment is dependent on the volume of your future credit card sales, rather than the usual financial markers used by banks and traditional lenders.

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During slow months, you don’t have to worry about affording fixed payments. You only pay a portion of the money you make that day. Some lenders go the extra mile and allow you to readjust your holdback amount during slow periods if repayment is causing financial hardship for your business.

Con: Expensive compared to other small business financing options

Because they work with riskier borrowers, MCA lenders offset the financial risk involved by charging higher interest rates. As a result, it’s common to see APRs ranging from 70% to even 350%. Avoid paying hefty fees by looking into other business financing options first.

Con: Frequent repayment schedule

With traditional loans and business credit cards, you make one payment a month on a fixed schedule. Because you know your minimum payment upfront, you can budget around that and adjust business spending as needed.

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On the other hand, the daily or weekly repayments involved with MCAs mean that, no matter what your other financial obligations are, your lender will withdraw the money it’s owed according to schedule anyway. High sales volume means that more money is taken out of your account—which makes these payments difficult to budget for.

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And because money is automatically withdrawn, you also can’t pay off your debt early to save on interest.

Con: Doesn’t build business credit

Unlike with traditional loan products, payments toward a merchant cash advance do not build your credit history. This is because MCA providers do not report the payments to business credit bureaus.

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Unless you really have no other alternatives, consider pursuing options that do build your business credit first. This will allow you to make the most of your current financial situation and help you qualify for better financing options in the future.

Con: Must accept credit card transactions

Because merchant cash advances rely on credit card payments, this financing method is only available to companies that process a significant amount of card transactions each month.

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Some lenders will also require you to give them access to your merchant account or purchase hardware directly from them in order to withdraw payments.

‍Can a merchant cash advance hurt your credit?

A merchant cash advance (MCA) typically does not affect your personal or business credit directly. This is because most MCA providers do not report to credit bureaus, unlike traditional loans or credit lines. However, there are indirect ways an MCA could hurt your credit:

1. Default or legal action: If you fail to repay the MCA and the lender takes legal action, this could result in judgments or collections, which may be reported to credit agencies, damaging your credit score.
2. Increased debt load: Although the MCA itself isn’t reported to credit bureaus, the high daily or weekly payments may strain your cash flow. This could lead to missed payments on other obligations, such as credit cards or loans, which would negatively affect your credit.
3. Limited access to other financing: Relying on an MCA might suggest to other lenders that your business is struggling, potentially reducing your ability to secure other forms of credit in the future.

In short, while MCAs don’t directly impact your credit score, the financial strain from high fees and frequent payments can create conditions that indirectly hurt your credit if not managed carefully.

When is a merchant cash advance right for your business?

Similar to working capital financing options, merchant cash advances are best for those who want a short-term loan to pay off short-term expenses, but don’t have access to cash or traditional loan products.

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Businesses with long-term cash flow issues should avoid this type of financing. Because of the fees involved, MCAs are not a long-term financial solution and can hurt your business if you don’t have the steady credit card sales needed to cover repayment.

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What is the difference between a loan and a merchant cash advance?

A loan is a structured form of financing where a business borrows a lump sum and repays it over time with fixed or variable interest. Repayments are typically made monthly and consist of both principal and interest, making it easier to budget. Loans are generally more affordable, with APRs ranging from 5% to 30%, but they require good credit, strong financials, and sometimes collateral. Additionally, loan payments are reported to credit bureaus, helping businesses build credit over time.

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A merchant cash advance (MCA), on the other hand, is an advance on future sales, repaid either through a percentage of daily credit card transactions or fixed ACH withdrawals. It’s easier to qualify for, as lenders focus on sales volume rather than credit score. However, MCAs are far more expensive, with effective APRs ranging from 70% to 350%, and they can strain cash flow due to frequent payments. Unlike loans, MCA repayments are not reported to credit bureaus, so they don’t help build credit.

Are merchant cash advances personally guaranteed?

Merchant Cash Advances (MCAs) may or may not require a personal guarantee, depending on the lender. However, many MCA agreements do include a personal guarantee, which makes the business owner personally responsible for repaying the advance if the business cannot meet its obligations.

Here’s how it works:

• With a personal guarantee: If the business defaults on the MCA, the lender can pursue the owner's personal assets (such as savings or property) to recover the owed amount.
• Without a personal guarantee: In some cases, an MCA might not require a personal guarantee, limiting the lender's recourse to the business's assets and future revenue.

Whether or not a personal guarantee is required depends on the lender's risk assessment, the business's financials, and the terms of the specific MCA contract. It's important to carefully review the agreement before accepting an MCA to understand your liability.

Where to find MCA lenders and how to apply

You won’t find merchant cash advances offered by banks and other traditional lending institutions, so your best bet is to find a provider online.

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Make sure to do your due diligence when vetting your options. Since the MCA industry isn’t well-regulated, there are many predatory lenders that are happy to take advantage of a business owner who doesn’t know any better.

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The application process is a short one, with little documentation required. You’ll typically need the following:

• Government-issued photo ID for all business owners
• Business license (or other documentation proving at least 6 months in business)
• Business bank statements from the last 3 months
• Credit card statements from the last 3 months
• No open bankruptcies

Since lenders use credit card transactions to determine repayment, keep in mind that you’ll likely need at least $5,000 in monthly credit card sales to qualify.

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Make sure to check your agreement before signing too—your factor rate and list of fees will be noted there, so make sure you’re able to repay the amount in full before you take on the debt. Once you submit your application, you can expect to receive updates on approval and funding in a matter of days.

What alternative funding options do business owners have?

If you’re looking into merchant cash advances to finance your business operations, chances are you’re having difficulty getting traditional business loans or lines of credit. Don’t give up, though, as you still have many alternative startup funding options available to you.

Programmatic funding

A type of funding pioneered by companies like Capchase, programmatic funding gives businesses with predictable recurring revenue—such as SaaS companies—access to funds by borrowing against their annual recurring revenue.

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Programmatic funding unlocks more credit for borrowers as the company’s revenue increases, so they can access the money they need without seeking additional funding or applying for loans. This, in turn, frees founders from the burdens of fundraising when their time could be better spent scaling their company.

Commerce sales-based underwriting

E-commerce businesses experience a unique set of financing constraints that aren’t often seen with other types of businesses. For instance, many of them work with very low profit margins—especially when they first start out—and because they operate online, they don’t have as many assets to use as collateral for business loans.

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Commerce sales-based underwriting, a financing solution offered by Ramp, pulls sales data from your online storefront and payment platforms and uses it to build your credit risk profile. This offers a much more accurate snapshot of your business finances so you can qualify for better financing terms and credit limits than you’d get otherwise.

Once funding is secured, what’s next?

If traditional business financing options seem out of your reach, Ramp’s suite of finance management and automation tools can help.

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Our underwriting program helps cash-strapped businesses get access to credit limits up to 30x the amount they’d get with traditional corporate cards—all without jumping through the hoops required by these card issuers. Timing is crucial, especially for online businesses, and this solution ensures you get quick access to cash right when you need it.

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Then, use our powerful spend management features—including spend controls and automated approval workflows—to keep an eye on how money is spent across your organization and prevent out-of-policy spend before it happens.

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And with Ramp, this is just the beginning. To learn how our platform can help your business maximize savings and work more efficiently, apply for an account today.

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