A merchant cash advance (MCA) is an expensive form of credit that should only be used as a last resort if you cannot get approved for other loans. However, if your business has a large volume of credit card sales, an MCA can provide you with the funds you need.
With an MCA, you’re issued a lump sum of funds. Repayments are made daily and are calculated based on your future credit card sales. As a result, the higher your sales, the more quickly the loan will be repaid.
MCAs are very expensive, and it’s not uncommon for annual percentage rates (APRs) to exceed 100%. We recommend considering an alternative financing option from a provider such as Credibly. It offers many types of loans that may be a better fit than an MCA, including loans for working capital, equipment, and lines of credit.
Pros & Cons of a Merchant Cash Advance
|Fast funding speeds||Very expensive form of financing|
|Easy qualification requirements||Repayment amounts can fluctuate based on credit card sales|
|Required repayment amounts can decrease if you have a slow month in sales||Requires daily repayments|
Who Should Consider a Merchant Cash Advance?
Although an MCA is very expensive, there are some circumstances in which it might be the best option for you. Here are some scenarios which may suggest an MCA is something you should consider.
You are unable to get approved for other financing options.
You might not meet a lender’s qualification requirements if you have bad credit, low revenue, or insufficient time in business as a startup. If this is the case and you have been unable to get a loan approval elsewhere, an MCA might be your only option for funding.
Before you go with an MCA, though, be sure to check out our list of providers who can issue bad credit business loans. You can also consider some of the alternatives we mention in our guide on startup business loans.
Your business has unpredictable revenue.
With an MCA, your monthly payments can fluctuate based on your credit card sales. Since this means your payments can go down if you experience a slower month, it can be more beneficial as opposed to being tied to the same minimum monthly payment amount on a traditional loan.
For the differences between an MCA and a traditional loan, head over to our merchant cash advances vs business loans comparison.
Merchant Cash Advance: Costs, Terms & Qualification Requirements
Costs, terms, and qualification requirements can vary depending on the lender you choose and your business credit and finances. However, we’ve summarized typical figures you may see if you decide to shop rates on a merchant cash advance.
Typical Rates & Terms
1.10x to 1.50x times the loan amount
40% to 150% and up
10% to 30%
$5,000 to $1 million
3 to 24 months
1 to 5 days
Typical Qualification Requirements
Time in Business
6 to 12 months
Annual Revenue or Credit Card Sales
$30,000 to $150,000
Example of Merchant Cash Advance Costs & How an MCA Works
Below is an example to illustrate just how expensive an MCA can be and how it works. Note that instead of an interest rate, MCAs use a factor rate. A holdback percentage figure is also used to determine your monthly payments:
- Factor rate: This is the amount a lender charges for advancing funds to you on an MCA. Multiplying the factor rate by your loan amount gives you the total repayment amount for the advance.
- Holdback percentage: This is the percentage of daily credit card receivables used to repay the advance.
Business & Lender Terms and Qualifications
Factor Rate (Determined by Lender)
Holdback Percentage (Determined by Lender)
Average Daily Credit Card Sales for Your Business
Example Calculations for Loan Repayments
Total Required Repayment Amount
$100,000 (loan amount) x 1.20 (factor rate) = $120,000
Daily Required Payment Amount
$6,667 (average daily sales) x 20% (holdback percentage) = $1,333.40
Total Time Needed to Repay Loan
$120,000 (total required repayment) / $1,333.40 (daily payments) = 90 days
As you can see from the example above, an MCA is an expensive form of financing. With a fairly typical factor rate of 1.20x, an advance of $100,000 would have cost your business $20,000 in fees over a period of three months. You can use our merchant cash advance calculator to see what the costs would be for your scenario.
How To Get a Merchant Cash Advance
If you decide that an MCA is a good fit, you can get funding by following these four steps. You’ll need to submit an application to your selected lender, provide any documentation requested by the lender, and then set up credit card processing to receive funding.
Step 1: Choose a Lender & Submit an Application
Most providers allow you to submit an online application, something that can normally be done in less than 10 minutes. MCA providers can include banks, credit unions, online lenders, and loan brokers. In choosing a lender, you should consider not only the costs associated with the loan but also things like customer reviews, hours of operation, and branch locations.
If you’re unsure where to start looking for an MCA, you can check out our recommendations of the best merchant cash advance providers.
Step 2: Provide Required Documentation
Depending on the lender you choose, you may be asked to provide documents as part of the application process. If not, you’ll be asked for these items after you apply. While an exact list of required items will vary depending on the lender and your business qualifications, required documents may include the following:
- Two months of credit card processing data
- Two months of business bank statements
- Personal and business tax returns
- Profit and loss (P&L) statements
Step 3: Set Up Credit Card Processing
Once you have been formally approved for an MCA, the next step will be to set it up with your credit card processor. If you don’t already have one or are considering switching credit card processors, check out our recommendations for the best online payment and credit card processors.
Step 4: Verify Receipt of MCA Funds
Following the successful competition of the credit card processing setup, you’ll be issued the funds for your MCA. Verify that you received the agreed-upon amount and that the repayment amounts being taken from your daily credit card receipts are consistent with the terms of the financing agreement.
If you discover that you’ve made a mistake after getting an MCA, you could still save some money by paying it off early. See our guide on how to refinance a merchant cash advance for instructions on how to do this.
When To Avoid Getting a Merchant Cash Advance & Alternatives
If you can get approved for almost any other type of loan, you should avoid getting an MCA. Many other loan options offer lower interest rates, charge fewer fees, and provide more flexible loan terms and repayment periods. There are also many loans and lenders that can cater to businesses with a wide variety of circumstances, including startups, businesses with bad credit, and companies with low revenue earnings.
We’ve listed some alternative loan types you should consider below. We also have a list of brokers and providers that can help you with the best merchant cash advance alternatives.
Term loans often have rates between 6% and 15%. With a term loan, you’ll be issued a single lump sum of funds. Lenders issue different types of term loans depending on your intended use of the funds. Working capital loans are a common type of term loan offered by lenders, allowing you to use funds for several business expenses, including daily operational costs, payroll, and rent.
Check out our recommendations for the leading working capital loan providers.
A small business line of credit allows you to draw funds on an as-needed basis and typically carries a rate between 10% and 15%. It’s a revolving credit line, which means that as you pay down your balance, you can draw additional funds up to your credit limit. Because of the flexibility of being able to draw funds at your discretion, it’s a good option for covering unexpected expenses or temporary shortages in cash flow.
We’ve compiled a list of the best small business line of credit providers that have a wide range of qualification requirements
Credit card interest rates typically range from 20% to 35%. Although similar to a small business line of credit, a credit card allows you to make purchases directly with the card. Credit cards are best for small and medium-sized expenses as credit limits generally range from $25,000 to $50,000. Some lenders may also offer a rewards program that can reduce the effective costs of your business expenses.
Head over to our roundup of the top-recommended small business credit cards.
Equipment financing can be used if you need to purchase or refinance business-related equipment. Interest rates are typically low, between 6% and 9%. This is largely because this type of financing is less risky to lenders since it is secured by the business equipment and can be taken by the lender in the event of a default.
With equipment financing, you can choose between a loan or a lease. With a loan, you become the owner and can retain possession of the equipment once the loan is paid off. With a lease, you’ll only be renting the equipment. Once the lease expires, you’ll typically need to give the equipment back to the vendor.
We talk more about these differences in our article on loans vs leases.
If you have good credit and at least 20% equity in your personal residence, you could be a good candidate for a HEL or HELOC. Both of these are loans that are secured by your property, so you could lose your home if you’re unable to make timely payments. Interest rates for a HEL and HELOC are currently averaging 8% and below.
With invoice factoring, you can get an advance on unpaid invoices you’ve issued to your customers. Eligible invoices typically require your customer to be another business or government entity. You can often get an advance of at least 80% on the amount of the outstanding invoice amount. With invoice factoring, your clients pay the amounts owed to the factoring company, after which you’ll be issued the remainder of the balance minus any fees.
Learn more in our guide on how invoice factoring works.
If you’re worried about your chances of getting approved for a loan, check out our guide on how to get a small business loan. It contains tips and recommendations for not only improving your approval odds but also for getting a better rate.
Frequently Asked Questions (FAQs)
A merchant cash advance is easier to get compared to traditional loans. Depending on the lender you choose, you’ll typically just need six months’ time in business, and annual credit card sales of $30,000 or more to qualify.
A merchant cash advance is very expensive, and it’s not uncommon for APRs to exceed 100% for this type of financing. Since there are other lenders and loan types that cater to startups and businesses with bad credit, an MCA should only be considered as a last resort.
If you can qualify for almost any other type of financing, a merchant cash advance probably isn’t the right choice for you. Other types of loans often offer lower rates, fewer fees, and more favorable loan terms and repayment periods. Some examples of alternative financing options include term loans, lines of credit, and business credit cards.
An MCA is an expensive form of financing that should only be used as a last resort. You should first consider alternatives that can offer more flexible loan terms at lower rates, such as working capital loans, lines of credit, and invoice factoring. There are many providers with flexible qualification requirements and specialize in lending to startups or businesses with bad credit.