A merchant cash advance (MCA) is a financing product wherein businesses receive funds upfront in exchange for a fixed percentage of their daily credit card receipts. MCA providers charge a cost of capital of 1.1x to 1.5x the amount advanced (~ 80% to 120% APR), and repayment is taken automatically from your credit sales.
MCAs have a relatively high cost of capital and are often used as a last resort for working capital needs. Before deciding to use an MCA as your source of financing, you may want to consider MCA alternatives. However, MCAs do have flexible, revenue-based repayment schedules which can be appealing to small businesses with large swings in sales.
If you’re interested in discussing specific MCA terms with a verified provider, Credibly offers both MCAs and term loans, ensuring that you get the best fit product for your business. MCA amounts range from $5,000 to $250,000, with factor rates of 1.15x to 1.41x. Credibly charges a 2.5% origination fee, and their average holdback percentage is 10% to 25%. Apply online and receive funding within 48 hours.
What Is a Merchant Cash Advance?
A merchant cash advance (MCA) is a cash advance given in return for a percentage of a business’ daily credit card receipts. MCA providers charge a cost of capital between 1.1x and 1.5x of the amount advanced. This results in a cost of capital that’s much higher than other small business loans.
How Merchant Cash Advances Work
With a merchant cash advance (MCA), the provider purchases a portion of your future daily credit card receipts, advancing you those funds upfront. The provider collects a percentage (8% to 30%) of your daily credit card receipts as payment, until the factor rate (typically 1.1x to 1.5x of the amount advanced) is repaid.
There are three basic steps involved in the process of obtaining an MCA. It begins with applying for the MCA, which can be done online. From there, the MCA provider will tell you the terms that you are approved for, which includes the factor rate (ranging from 1.1x to 1.5x of the advance). If you agree to the terms, funding (up to $500,000) occurs within five days. The provider collects the holdback percentage (8% to 30%) daily, directly from your credit card processor, until the advance is repaid.
The process involved in obtaining and repaying an MCA is:
Apply for an MCA
To apply for an MCA, you simply need to visit the provider’s website and complete their online application. The application can typically be completed in just a few minutes. Approval is fast, and you can typically receive funding within two to five days.
Consider Your Total Cost of Capital
Your repayment amount is based on what the MCA provider refers to as the “factor rate.” The factor rate is the multiple of the amount advanced that a business will have to repay. This amount stays the same regardless of how quickly the advance is paid in full. For example, the average factor rate of an MCA is typically equal to:
1.1 to 1.5 Average Factor Rate
This means that for every dollar advanced, a business will have to repay $1.10 to $1.50 over the life of the advance. So, if a company receives a lump sum payment of $10,000, at a factor rate of 1.2x, the business will have to pay the MCA provider a total of:
($10,000) x (1.2) = $12,000
Because the payback amount is predetermined by the factor rate, it remains the same whether you pay the advance back in three months or a year. Unlike an interest rate, where interest accrues over time and repaying early saves you money, a factor rate isn’t impacted by the amount of time it takes to repay the advance.
Automatically Pay Back the Advance
Your payments are deducted automatically by your credit card processor daily. The amount of the payments is determined by the holdback percentage agreed upon when you received the advance (generally 8% to 30%). On days that your sales are higher, the amount collected will be higher because your payment is percentage based. Conversely, on days when your credit card sales are lower, your MCA payment will be lower.
Using our previous example, if a company borrows $10,000 with a factor rate of 1.2 and a holdback percentage of 10%, and if the company typically has $500 worth of daily credit card transactions, the MCA provider would receive the following payments daily:
($500) x (10%) = $50
This variability in daily payment amounts, and the overall cost of capital, make MCAs an expensive financing option. They are most often used by seasonal businesses, or used as a last resort by companies that can’t find funding elsewhere. Before deciding that an MCA is right for you, you should compare the features of MCAs versus small business loans.
Merchant Cash Advance Providers
Merchant cash advances (MCAs) are issued by MCA companies. There are countless MCA providers, and there are certain factors that you should consider before you choose one. You will want to know the maximum advance amount, the factor rate that they will charge, the holdback percentage, and if they charge additional fees.
When assessing potential MCA providers, important factors to consider are:
- Advance Amount: The amount that the MCA company will advance.
- Factor Rate: Your factor rate represents the total cost of capital. Therefore, you need to ensure that you’ll be able to pay back the original lump sum amount plus the cost of capital.
- Holdback Percentage: The higher the holdback percentage, the more an MCA provider takes out of your daily credit card cash flow.
- Additional Fees: Some MCA providers charge additional fees, such as setup fees or advance fees. These fees can total as much as 5% or more, so it’s important to know what additional fees your provider charges.
- Customer Reviews: Reading reviews from others that have done business with the company can help you decide whether or not the MCA provider is reputable.
MCA Providers At-a-Glance
|Merchant Cash Advance Provider||Best For|
|Credibly||Businesses with at least $15,000 in monthly credit card sales|
|CAN Capital||Businesses with low monthly credit card sales|
|Fora Financial||Startup businesses with as little as three months of business operations|
Three MCA companies are:
If your business needs quick financing for working capital or cash flow needs, Credibly can approve and issue a cash advance within 48 hours. Advance amounts range from $5,000 to $250,000, with factor rates ranging from 1.15x to 1.41x. Credibly charges a 2.5% origination fee, and their average holdback percentage is 10% to 25%. To find out what other users think, you can visit our Credibly Reviews page.
2. CAN Capital
CAN Capital offers MCAs of up to $150,000 with factor rates ranging from 1.15x to 1.35x. CAN Capital charges a fixed administrative fee of $395. Businesses with monthly credit card sales of $4,500+ per month and four months’ of business operations can qualify for an MCA. This combination of requirements allows newer businesses to be eligible. Find out what CAN Capital customers think by reading our CAN Capital Reviews.
3. Fora Financial
Fora Financial charges a factor rate between 1.15x and 1.33x of the amount advanced. Unlike RapidAdvance, which doesn’t charge any fees, and similar to Credibly, which charges 2.5%, Fora Financial charges a loan origination fee equal to 4% of the advance amount; the fee is taken directly out of the MCA.
Who Merchant Cash Advances Are Right For
Merchant cash advances (MCAs) are often right for businesses with seasonal or cyclical revenues that have been unable to find other short-term financing. Businesses in need of faster funding than they could get through a working capital loan, or that don’t qualify for SBA express loans, may also find MCAs to be an appealing financing option.
As Angelo Mendola, the Chief Operating Officer of Priority Payments, tells us:
“MCAs can be a good option when a business needs funds fast, the business owner has fair to average credit and can’t qualify for a traditional loan, or if a business doesn’t have several years in operation (because most banks will require at least two years in business for a loan). The overall speed of the advance is typically the most important.”
However, remember that there’s less federal regulation around MCAs, and you might encounter some predatory lending practices. It’s important to check the reputability of any MCA provider. MCAs can still be advantageous for companies that need to fund short-term financing needs or need an influx for working capital—if a reputable provider is used.
For example, we interviewed Ryan Rossett, the co-CEO of Credibly, who said:
“An MCA is a great source of working capital financing for seasonal businesses. Since repayments are made as a percentage of a company’s daily credit card receipts, seasonal businesses aren’t put into financial distress like with a fixed-term loan.
Instead, the amount of repayment is tied to the success of the business. So, in slower months, seasonal businesses repay comparatively less than in busier months, helping a business with a quick cash advance and with favorable repayment terms as well.”
Still, many businesses fall into a never-ending cycle of MCAs. A company might use an MCA to pay off an existing debt, only to find that the MCA repayment is more expensive, so they take out another MCA to pay off the first one. When applying for an MCA, it’s important to ensure that you’ll be able to make full repayment in a timely manner.
Since MCAs are an expensive form of small business financing, if you are able to qualify for another financing option, it would likely be a better choice. Most alternatives to MCAs with offer you a lower overall cost of capital, and will ultimately be less expensive for you than an MCA.
Merchant Cash Advance Costs, Terms, & Qualifications
Merchant cash advances (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%. There are minimal eligibility qualifications for MCAs, making them easier to obtain than most short-term financing solutions.
The typical costs, terms, and qualifications for an MCA are:
1. MCA Costs
MCAs are an expensive short-term financing option. The costs associated with an MCA are largely dependent on the following factors: the amount of the advance that you need, the factor rate charged by the provider on the amount advanced to you, and the daily holdback percentage of your daily credit card receipts.
The costs associated with MCAs are:
- Factor Rate (1.1x to 1.5x on average) – The factor rate is the amount that the MCA provider charges you for use of the funds (in lieu of an interest rate). The typical factor rate for an MCA is 1.1x to 1.5x the amount advanced.
- Amount Advanced Relative to the Factor Rate – Because the factor rate is a multiplicative cost, the actual cost of the capital can only be determined once you know the full amount that you are going to advance.
- Holdback percentage (8% to 30%) – The holdback percentage is the amount that the MCA provider collects daily from your credit card receipts as payment on your advance. The average holdback percentage for an MCA is between 8% and 30%.
- Expected APR (80% to 120%) – Due to the short repayment terms, and the high cost of capital due to the factor rate, the expected APR for an MCA ranges from 80% to 120%.
MCA Amount Relative to the Factor Rate
The average financing amount of an MCA is typically between $5,000 and $500,000. When applying for an MCA, the MCA provider approves the business for a maximum advance amount based on:
- The business owner’s credit score
- The business’ average monthly credit card receipts
MCA providers typically want to ensure that a business has the credit card receipt volume to repay an MCA in a timely manner. Depending on the size of the advance, the MCA provider also issues a factor rate. The lower the advance, the higher the factor rate, and vice versa.
The factor rate is the total amount a business will have to repay the MCA provider. The average factor rate on an MCA is typically between 1.1x and 1.5x. Let’s say a company receives an MCA of $10,000 and has a factor rate of 1.4x. In this example, the business will pay the MCA provider $14,000 ($10,000 advance x 1.4x factor rate) over the life of the advance, with a 40% total cost of capital.
After determining the advance amount and factor rate, the MCA provider sets the holdback percentage. The holdback percentage represents the amount that the MCA provider will collect from the business’ daily credit card receipts. The holdback percentage, typically 8% to 30%, is based on the amount of the cash advance, the expected repayment period, and the number of monthly credit card transactions your business has.
The daily holdback is facilitated by the company’s credit card processor, and a business doesn’t have to make any direct repayments to the MCA provider. If you have a holdback percentage of 10%, the MCA provider will collect 10% of your daily credit card receipts as payment on the advance. Since credit card receipts fluctuate daily, the daily payment will also fluctuate.
Expected APR on MCAs
The APR for an MCA (typically 80% to 120%) fluctuates based on your daily credit card transactions, agreed holdback percentage, and any additional fees (which can reach as much as 5%). The most important thing, however, is the factor rate, which represents the total amount you will have to repay over the life of the advance.
2. MCA Terms
An MCA is a quick financing option for businesses in need of working capital. Approval is typically issued within 24 hours of submission of your application, and funds can be expected within two to five days. However, the repayment term for an MCA is variable and is typically between 12 and 24 months.
The time for repayment is variable because payment is based on a percentage of a business’ daily credit card receipts. This means that the daily repayment amount is dependent on a business’ credit card cash flow. The total amount that’s repaid is always the same regardless of time frame; however, the faster a business pays back its MCA, the higher its APR (which typically ranges from 80% to 120%).
Example of MCA Repayment Terms
Using the scenario in which you received an MCA in the amount of $10,000 with a factor rate of 1.4x that resulted in a total repayment of $14,000, we can provide you with a simplified example of what the repayment on that MCA would look like. Assuming that you have monthly credit card sales of $2,500 and a holdback percentage of 30%, it would take you about 19 months to repay the advance.
Here’s how you can roughly estimate your repayment term:
- Determine your estimated monthly payment by multiplying your average monthly credit card sales by the holdback percentage:
$2,500 (monthly credit sales) x 30% (holdback percentage) = $750 monthly payment
- Divide the total cost of funding by your estimated monthly payment amount to determine the number of months it will take to repay:
$14,000 (total cost of funding) / $750 (estimated payment/month) = 19 months
In this scenario, it would take 19 months to repay your MCA. If your monthly credit card sales increased, your repayment term would decrease, and vice versa.
3. MCA Qualifications
The qualifications for MCAs are relatively minimal compared to conventional business loans and alternative business loans. While requirements vary by provider, typical qualifications for MCAs are $2,500+ monthly credit sales, a history of accepting credit card payments with a credit card processor account, and a credit score of at least 500.
The typical qualifications for an MCA are:
- $2,500+ monthly credit sales
- Three+ months of business operations
- 500 to 600+ personal FICO score (check your credit score for free)
- Credit card processor account
Further, MCA providers will want to check the personal credit score of the business owner. Remember that an MCA is not a loan and it won’t show up on the owner’s credit report. However, the business owner is fully liable for the company’s MCA repayment.
Finally, MCA providers require that companies work with a partner credit card processor. This is because the MCA provider uses the partner processor to subtract the daily holdback percentage and deposit it into their account.
Merchant Cash Advance Application Process
The merchant cash advance (MCA) application is as short as one to two pages, is fairly straightforward, and can be completed online. After submitting your application, you will be asked to provide additional information regarding your credit card sales and business finances. Approval is fast, and you can typically receive funding within two to five days.
The six steps involved in getting an MCA are:
1. Fill Out Online Application
The application process typically consists of completing a one- to two-page application form found on an MCA provider’s website. This application is used to assess the high-level suitability of a company. Once the application is filled out and reviewed by the MCA provider, they will reach out and ask for more specific documentation.
As part of the application, business owners are required to submit the following:
- Social Security number
- Business tax ID
- General information about the business
2. Provide Additional Documentation
If the online application looks good, the MCA provider will contact you to provide additional documentation regarding your credit card processing statements, evidence that you have been accepting credit cards for at least two years, and your business account bank statements. This usually occurs within 24 hours of the submission of the online application.
Specifically, business owners should expect to provide:
- Two+ months’ of credit card processing data
- Two+ months’ of business bank statements
- Evidence of two+ years accepting credit cards
This additional documentation is used to ensure that a company has at least $50,000 in annual credit card receipts as well as the cash flow needed to repay an MCA. As long as a business meets the minimum annual credit card receipt requirements, has adequate cash flow, and has two+ years accepting credit cards, an MCA provider will most likely approve the MCA.
3. Get Approved for an MCA
Based on the information provided during the application process, the provider will approve an MCA for your business, usually within 24 hours. Once your advance has been approved, the MCA provider will provide you with the amount of advance that you qualify for, your factor rate, and the required holdback percentage.
The approval is nonbinding and gives a business owner the information needed to decide whether to accept or deny the MCA. For example, if the maximum lump sum amount is too low, the factor rate too high, or the holdback percentage too high, a business owner might decline the MCA. If, however, the opposite is true, or if the financing needs are great enough, a business owner will accept the terms given to him or her by the MCA provider.
4. Set Up Credit Card Processing
If a business isn’t already using a credit card processor that is approved by their MCA provider, the company will be required to switch credit card processors. This is because MCA providers work with specific processing companies in order to collect the daily holdback amount required to repay the MCA.
It might be inconvenient and time-consuming to switch, but it is a requirement when accepting the advance. The time to switch can potentially add as much as a week onto the timeline to funding.
5. Receive the Lump Sum Cash Advance
Once the proper credit card processor is set up, the company is ready to receive the cash advance and begin paying the MCA provider daily. The initial cash is deposited directly into a business’ bank account. Payments then come directly out of the company’s daily credit card receipts, similar to a processing fee.
The credit card processing company facilitates the repayment. They do this by taking a percentage of the business’ daily receipts and deposit those funds into the account of the MCA provider.
6. Make Daily Payments from Merchant Account
As soon as the cash advance is received, the business starts making payments based on a percentage of the company’s daily credit card receipts, known as the holdback percentage. Payments are taken directly from the company’s merchant credit card account, and businesses should be ready to make payments as soon as they receive the cash advance.
As long as there is money in the merchant account, an MCA provider will receive daily payments from the credit card processor. The total time it takes to repay the advance is variable and based on a company’s average daily credit card receipts. However, the typical length of repayment is between 12 and 14 months.
Pros & Cons of Merchant Cash Advances
There are advantages to a merchant cash advance (MCA). You can receive MCA funding quickly, they are easy to qualify for, and simple to apply for. However, the overall cost of an MCA is much higher than other short-term financing options. The high cost of capital, coupled with the irregularity of the daily payment amounts, can make an MCA a short-term solution to a long-term need.
Pros of an MCA
Some of the pros of MCAs are:
- Funding Is Quick – MCAs are one of the fastest ways for a small business to receive financing, often within 48 hours of applying.
- Applying Is Simple – MCA applications can be completed online, and with very little additional documentation required.
- Qualifying Is Easy – Compared to other financing options for small businesses, MCAs have very basic minimum qualifications, making them much easier for businesses to be eligible for this type of funding.
Cons of an MCA
Some of the cons of MCAs are:
- Financing Costs Are High – Due to the factor rate on MCAs, this type of financing can often have APRs in the triple digits, depending on how quickly the advance is paid off. This makes it one of the most expensive funding options for small businesses.
- Payments Are Uneven – Payments are based on a certain percentage of your daily credit card sales. As such, your total payment towards the advance can vary significantly from day to day and month to month, making budgeting difficult.
- Solution Is Short-Term – While you can receive funds quickly to cover your immediate working capital needs, the high daily percentage withdrawal from your credit card receipts and high repayment costs can become an overwhelming burden to your business.
Alternatives to Merchant Cash Advances
Merchant cash advances (MCAs) are not the only short-term financing options available to small businesses. Due to the high overall costs of MCAs, businesses should also look at other alternatives to finance their short-term equity needs. Some examples of alternatives to MCAs are business loans, lines of credit, and accounts receivable financing.
Three good alternatives to an MCA are:
1. Alternative Payment Processing Loans
Similar to an MCA, some payment processors will offer you advances on your future sales processed through them. They will advance you funds, and will collect payment daily based on a percentage of your processed sales. While they operate in a very similar manner to an MCA, the factor rates associated with advances through your payment processor will likely be significantly lower.
Two options for alternative payment processing loans are:
- Square Capital – Square Capital offers advances of up to $100,000 to businesses that use Square to process their sales. They charge a factor rate of 1.10x to 1.16x (resulting in an estimated APR of 30% to 35%). Payments are taken automatically from your daily Square sales based on a holdback percentage that ranges from 8% to 15%. You can apply online in minutes, and receive funding within one day.
- PayPal Working Capital – If your business processes over $15,000 annually in PayPal sales, you could be eligible for a payment processor advance. You can use the sample fee calculator on their pricing page to estimate the amount of the fixed fee that you would be charged for an advance. You can apply online in five minutes and receive funding almost immediately.
2. Business Loans & Business Lines of Credit
Small business loans and business lines of credit are more traditional ways to obtain short-term financing. These financing options provide upfront cash in return for fixed monthly payments, consisting of principal and interest, for a predetermined repayment term. Qualifications for business loans and lines of credit are more stringent than an MCA, with eligibility based on your business’ financial performance and both your business’ and personal credit scores.
There is no factor rate or holdback percentage with a small business loan or business line of credit. Instead, business lenders charge a monthly interest rate based on a business’ qualifications and loan amount. Average interest rates can range from 7% to 36%, and the maximum loan amount can be anywhere from $10,000 to $500,000 or more. The total time to repayment typically takes anywhere from three months to three years, depending on the lender.
Two options for business loans and business lines of credit are:
- OnDeck – OnDeck is a small business lender that offers term loans up to $500,000 and lines of credit up to $100,000, with interest rates between 9% and 13.99%. Payments are made monthly and loan terms are between three months and 36 months.
- Kabbage – Kabbage is another small business lender that offers small business loans and lines of credit up to $250,000. The lender charges 1.5% to 10% in interest and requires that all loans be repaid within six to 12 months. Funding can happen in as quickly as one business day.
3. Accounts Receivable Financing
Accounts receivable financing is another way to receive short-term business financing. Accounts receivable financing is a loan option wherein businesses use their accounts receivable as collateral. Accounts receivable financing companies advance between 80% and 100% of a business’ accounts receivable and then collect the outstanding invoices for a small fee (generally around 0.5% weekly).
Accounts receivable financing companies typically base their qualifications on the amount of a business’ outstanding accounts receivable. The best AR financing companies can get you funded in about one business day.
Two examples of accounts receivable financing companies are:
- BlueVine – BlueVine offers invoice factoring amounts between $5,000 and $5,000,000. The lender charges a factor rate starting at 0.25% per week, and its application is 100% online. Businesses can expect to receive financing in as little as a day.
- FundBox – FundBox offers invoice financing up to 100% of a company’s outstanding invoices. FundBox has a maximum loan amount of $100,000 and a factor rate of 4.66%. Loan terms are for a 12-week period.
Merchant Cash Advance Frequently Asked Questions (FAQs)
A lot of information has been covered in this article about merchant cash advances (MCAs), what MCAs are, how they work, finding the right lender, and how to apply for a loan. If you have any questions about any of the information presented here, you can post them in the Fit Small Business forum.
Some common questions regarding MCAs are:
How do MCAs Work?
An MCA provides your small business with a lump sum payment upfront in exchange for a fixed percentage of your future credit card sales. As payment, the MCA provider receives a percentage of your business’ daily credit card receipts until the advance, and any additional fees, have been paid in full.
What Is an MCA Loan?
An MCA is not a loan in conventional terms. It is actually an advance on your future credit card sales. The MCA provider advances you funds, and then collects a percentage of your daily credit card receipts until the advance and associated fees are paid in full (usually less than 24 months).
How Much Does an MCA Cost?
MCAs are an expensive short-term financing option. The MCA provider charges a factor rate (typically 1.1x to 1.5x), which is multiplied by the amount advanced to determine the repayment amount. If you borrow $10,000 at a factor rate of 1.4x, you will repay $14,000 (plus any origination fees).
Throughout this article, we’ve provided the answer to the question “what is a merchant cash advance” and covered key information you need to know before you choose this financing option. To recap, a merchant cash advance (MCA) is a cash advance given to a company in return for a percentage of its daily credit card receipts. MCAs can typically fund between $5,000 and $500,000. Payments to the MCA provider are collected daily from the company’s merchant account, based on a holdback percentage, until the advance is repaid in full.
While the funding is fast, MCAs are costly. MCA providers charge a factor rate that results in a cost of capital between 20% and 40%. Based on the factor rate and holdback percentage, an MCA is repaid anywhere from 12 to 24 months. Credibly offers some of the lowest factor rates we’ve found, and can get you funded within 48 hours.