Merchant cash advance: what it really costs
A merchant cash advance (MCA) is the fastest money most small businesses can get, often funded in a day or two with thin paperwork. It is also usually the most expensive. This guide shows you how to price one honestly before you sign.
- Typical amount
- $5,000 to $500,000, sized to your monthly revenue
- Typical cost
- Factor rate of about 1.10 to 1.50
- Repayment
- Daily or weekly debits, or a fixed share of card sales
- Term
- Usually 3 to 18 months
- Speed
- Often 24 to 72 hours
- Best for
- A short, specific need that pays for itself quickly
How a merchant cash advance works
Legally, an MCA is not a loan. The provider buys a slice of your future sales at a discount. You get cash today, and you agree to deliver a larger amount of future receivables over time. That structure is why approvals lean on your bank deposits and card volume more than your credit score, and why MCAs can fund businesses that banks turn down.
Repayment usually comes one of two ways:
- Fixed ACH debits. A set amount leaves your business bank account every business day or every week. This is the most common setup today.
- Split funding (holdback). The provider takes a fixed percentage of each day's card sales, often 5% to 20%, directly from your processor. Slow days mean smaller payments.
Because the provider is buying receivables rather than lending, a genuine MCA should include a reconciliation clause. That clause lets you ask for your payments to be adjusted if your sales actually fall. If a contract demands fixed payments no matter what happens to your revenue and gives you no way to reconcile, it is behaving like a loan. That matters for your rights, so ask about it directly.
Factor rates, and why they look cheaper than they are
MCAs are priced with a factor rate, not an interest rate. You multiply the advance by the factor to get the total you will pay back.
Take a $50,000 advance at a 1.35 factor. You pay back $67,500, so the cost is $17,500. That sounds like "35%," but it isn't 35% a year. You repay it within months, and you start repaying the day after funding, so you never actually hold the full $50,000.
| Same $50,000 at 1.35 factor, repaid over… | Daily payment | Approximate APR |
|---|---|---|
| 12 months (252 business days) | $268 | about 63% |
| 9 months (189 business days) | $357 | about 84% |
| 6 months (126 business days) | $536 | about 126% |
| 9 months, with a $2,500 fee taken from funding | $357 | about 100% |
The dollar cost is identical in every row. The shorter the term, the higher the true annual cost, because you are paying the same fee for less time with the money. Fees deducted at funding push it higher again, since you receive less cash but repay the same amount. Run your own numbers in our true-cost calculator.
Always compare in dollars and APR, never in factor rate alone. A 1.25 factor over 4 months can cost more per year than a 1.40 factor over 14 months.
California and New York require many commercial funding providers to disclose an estimated APR, and several other states have their own disclosure rules. Even where it isn't required, any honest provider should be able to tell you the estimated APR when you ask.
Contract terms to read before you sign
- Total payback and net funding. Get both in writing. The net is what actually lands in your account after fees.
- Fees. Look for origination, underwriting, administrative, ACH or "processing" fees. Ask whether they come out of funding or get added on top.
- Reconciliation. How do you request an adjustment if sales fall, how often, and what documents do they need?
- Prepayment. Many MCAs give no discount for paying early, because the factor fee is fixed. Some offer an early-payoff discount. Ask, and get the answer in writing.
- Personal guarantee. Most MCAs include a guarantee from the owner. Understand exactly what it covers.
- UCC lien. The provider will usually file a UCC-1 against business assets. That can make future financing harder until the advance is paid off.
- Default triggers. Changing banks, blocking the debit, or taking another advance can all count as default.
- Confession of judgment. Some contracts ask you to sign away your right to defend yourself in court before any dispute exists. Several states restrict these. Treat one as a reason to stop and get advice.
The stacking trap
"Stacking" means taking a second or third advance while the first is still being repaid. Each new advance adds another daily debit. Many businesses that get into trouble with MCAs did not fail on the first one; they failed when two or three debits together took more than the business earned on a normal day. If an offer arrives while you are still paying one off, add every daily payment together and compare the total to your average daily deposits before you say yes.
When an MCA makes sense, and when it doesn't
An MCA can be a reasonable tool when:
- the money produces a clear, quick return, such as inventory you have already pre-sold or a seasonal rush;
- speed is worth more than cost, for example an emergency repair that would otherwise shut you down;
- you can't qualify for cheaper options yet, and you have a plan to graduate to them.
It is usually the wrong tool for covering ongoing losses, paying off another advance, or funding a long-term project. Compare it with a business line of credit, a working capital loan or, if you invoice other businesses, invoice factoring. Those often cost far less if you qualify.
What providers typically look at
- At least 6 to 12 months in business
- Consistent monthly deposits, commonly $10,000 or more
- Your last 3 to 6 months of business bank statements
- The number of negative-balance days and any existing advances
- Credit score, which matters less than for a loan but is usually still checked