Is a Merchant Cash Advance (MCA) Worth It?

Last updated Dec. 18, 2024
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If you’ve landed on this page, then you’ve likely been exploring your options for a small business loan and are finding it difficult to qualify for one. Here’s the short answer to the question of whether or not a merchant cash advance (MCA) is worth it: possibly.
For some business owners, a merchant cash advance may really be the only option for getting much-needed funds. Other business owners may prefer this financing option because repayment flexes with the ups and downs of sales—and they may be undeterred by notoriously high rates.
Now, let’s help you figure out if a merchant cash advance is a worthwhile option for you and your small business.

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What Is a Merchant Cash Advance?

A merchant cash advance is not a business loan. It is a lump sum advance from an MCA company—not a lender—that you repay via a percentage of your daily credit and debit card sales, plus a fee.
Typically, merchant cash advances are repaid on a daily or weekly basis, and the financing company takes the payment automatically from your payment processor. In this way, repayments are based on your sales: If you experience a slow in sales, your payments will be lower—but it will also take you longer to repay the advance.
Merchant cash advances are usually easy to qualify for, even if you’re a startup or have bad credit, and fund quickly. But (and there are a couple of big buts here):
  1. MCAs are known for high APRs that typically run in the high double digits and sometimes tip well into triple digits. (You read that right. APRs on some MCAs reach as high as 350%.)
  2. Because they’re not actually business loans, there’s little regulation of merchant cash advances. (See the cons list below for more on what this actually means for a business.)
Generally, you’ll want to consider all of your other options for business financing before turning to a merchant cash advance.

Merchant Cash Advance at a Glance

Max AmountUp to $5 million
Repayment ScheduleDaily or weekly
Factor Fee*Approx. 1.1 to 1.5
Funding SpeedAs fast as 1 day
*Instead of an interest rate, merchant cash advance companies measure their fees with a factor rate, sometimes referred to as factor fee. The factor rate you receive on an MCA will be based on the company’s evaluation of your qualifications.

Pros and Cons of a Merchant Cash Advance

Pros

In general, you can apply for an MCA online and receive approval and funding in as little as 24 hours. Compared with other loans that require extensive documentation, MCAs have very simple application processes.
MCAs are one of the easiest financial products to qualify for. MCA companies will often pull your credit score and evaluate your other qualifications; however, they’re much more lenient when it comes to approval.
Many MCA companies will work with startups, businesses with bad credit, as well as those with previous financial issues. Of course, your qualifications will not only affect your ability to get approved but also your rate. If you have bad credit, for example, you’re more likely to see higher rates.
Overall, a merchant cash advance can be used to fund essentially any business purpose. You can use an MCA for working capital, to purchase inventory, cover payroll, or any other similar short-term costs.
Whereas repayment on a traditional business loan remains the same regardless of how your business is performing, your MCA payments will vary based on your business’s sales. If your business has a slow period, you’ll be paying less on a daily or weekly basis.

Cons

We can’t stress this point enough—a merchant cash advance is one of the most expensive forms of business funding. Although the rates and terms of an MCA may seem reasonable, when you look further, you’ll see that rates significantly exceed any other type of financing.
Because you’re repaying an MCA so frequently, and directly from your incoming sales, this type of financing significantly impacts your cash flow.
If you’re a less qualified business in need of financing, an MCA may seem like your only option, but with high fees deducted straight from your cash flow, it can be difficult to repay. Therefore, many borrowers attempt to refinance or add another MCA, which only leads to further financing issues and a risk of default.
Due to the way MCAs are structured—with factor rates, percentages of daily sales, and no specific terms—their contracts can be extremely confusing. Business owners may sign them to get funds quickly without fully understanding the agreement.
MCAs don’t face the same regulations as other types of business financing. Historically, this has led businesses to fall victim to misleading sales tactics and advertising, especially from merchant cash advance brokers who approach them promising fast funding and easy approvals.

How Does a Merchant Cash Advance Work?

A merchant cash advance company provides you with a lump sum of cash, which you then repay on a daily or weekly schedule (versus the typical monthly repayment schedule of many business loans). Generally, repayment of a merchant cash advance works in one of two ways:
  • You repay the advance, plus fees, as a percentage of your daily or weekly debit and credit card sales. Payments are withdrawn automatically from your merchant account until you’ve repaid the full amount (including the fees).
  • Repayments are drawn directly from your bank account, instead of a merchant account. The merchant cash advance company connects to your bank account and collects repayment, plus fees, using ACH withdrawals.
Unlike most other types of business loans, merchant cash advances do not have set annual percentage rates or repayment terms.
Buyer, beware!
A merchant cash advance is not technically a loan, so it exists in a vague, unregulated financing space without any federal oversight.
As a result, many MCA companies can get away with requiring business owners to sign a confession of judgment. This document allows the MCA company to receive a court order against your business without notifying you in advance, if you were to default on the loan. If you pursue an MCA for your financing needs, read your agreement thoroughly and carefully before signing—and do not sign a confession of judgment .

Merchant Cash Advance Rates and Fees

It cannot be overstated: merchant cash advances are expensive. It’s therefore important to understand how MCA financing companies charge fees. Just as MCAs are structured differently than most business loans, the way you’re charged interest on this financing product is different as well.
Instead of an interest rate, merchant cash advance financing companies measure their fees with a factor rate, sometimes referred to as factor fees. The factor rate you receive on an MCA will be based on the company’s evaluation of your qualifications. Typically, factor rates range from about 1.14 to 1.48.
This is why MCAs can be so misleading—at first glance, the numbers seem reasonable, and a factor rate of 1.18 seems low. However, when you calculate the APR on these products, they often end up being very expensive, especially in comparison with other types of business financing.
For this reason, before you agree to a merchant cash advance from a financing company, you’ll always want to convert the factor rate to an APR to determine the true cost of this debt and decide whether it’s something you can afford.
It’s also important to note that some MCA financing companies will charge additional fees—most often, you’ll see an “administrative fee” that is charged to set up your account. Make sure you understand all the costs of a merchant cash advance before agreeing to one.

Merchant Cash Advance Terms

Whereas traditional business term loans have a set repayment period—you repay a loan with monthly payments over a term of five years, for example—merchant cash advance terms do not work the same way.
Because the repayments for an MCA are based on your sales, the terms will vary. In other words, you’ll repay the advance for however long it takes to cover the total amount you received plus fees. The term could be as short as three months or as long as 18—it all depends on your business.
Keep in mind, paying the financing company a higher fixed percentage of your sales will equal a shorter repayment time—but also a tighter cash flow.

Qualifications for a Merchant Cash Advance

*Based on past Fundera customers
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Annual RevenueOver $120K
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Credit Score600
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Time in Business6 months+

Fundera Can Help

Curious to see what kind of small business financing you qualify for? Fill out one simple application with Fundera, and we’ll show you your options. This won’t impact your credit score, and there’s no obligation to get your funding through one of our partners.
Let’s get you funded!

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