Merchant Cash Advance Pros and Cons

Merchant cash advances (MCAs) have become a popular way to finance a small business. This solution allows you to finance future sales and get funded quickly. As a result, an MCA can be a useful option in certain circumstances.

Like any financial product, merchant cash advances have both advantages and disadvantages. This article helps you understand the pros and cons of this product so you can determine if it is the right solution for your small business. If you are not familiar with merchant cash advances, you can get detailed information here.


Merchant cash advances and cash advance loans have some disadvantages that you should be aware of. Before getting funding, weigh these disadvantages against the potential benefits.

1. They are expensive

One of the major disadvantages of merchant cash advances is that the product is very expensive, compared to other products. On average, you will pay from 9% to 50% over the amount of your funding, often over a short period of time.

Merchant cash advance companies determine the amount you must repay by a applying a factor or multiplier to the amount of funding. The factor is often in the range of 1.09 to 1.50. For example, if you finance $100,000 and the finance company applies a factor of 1.25, you must repay $125,000 ($100,000 x 1.25) during the term of the loan.

2. They are only a short-term solution

Cash advances are usually made for a short period of time, from 3 months to 15 months. This short time frame is another reason why cash advances are expensive. Because of this short term, consider using the product only if it solves your financial problem and generates enough revenues to repay the financing (plus interest). Otherwise, using a cash advance could become counter-productive.

3. They may not solve your problem

One of the biggest problems with merchant cash advances is that they are often used incorrectly. Although the product is not considered a term loan, it operates much like one. Your company gets an immediate cash infusion and the line is paid back in regular (daily) installments. Repaying the line in this way reduces your funds availability. This last point is very important.

To use a simplified example, assume that you get an MCA for $100,000 that requires a payback of $120,000 in six months. Assume that the payback is in equal installments, which is not always the case. By the third month, you will have repaid $60,000, which leaves you with $40,000 in availability ($100,000 original line – $60,000 in payments = $40,000). By the end of the fifth month, you will have paid $100,000, which was the original amount you got, with one more month of payments to go.

Some business owners don’t account for this situation. In these cases, the company runs into financial problems a few months after getting the initial cash advance. Unfortunately, many business owners respond to this situation by getting a second cash advance loan. They use the second loan to meet the payment obligations of the first loan, and for some additional cash flow. Often, the solution is temporary.

Before long, the company has multiple MCA’s. Having multiple MCA’s is called ‘stacking‘ and is financially dangerous. Many companies in this situation get into a financial tail spin. Often, they never recover from it. The only solution to this problem is is to pay off the cash advances, either by using a small business debt consolidation solution or some other alternative.

4. Financing future sales is risky

Lastly, the premise of a cash advance is that you are selling future sales. This premise can be a problem for some businesses because the future is hard to predict – exposing you to the risk of getting an MCA or an ACH loan and then having your sales drop. By the way, this risk applies for any type of loan or financing product. However, it is a serious concern for MCAs and ACH loans due to the high costs and short repayment periods.


Keep in mind that merchant cash advances have a number of advantages as well. They can be a useful solution if your company has to capitalize on an opportunity very quickly, or if it has an urgent need for cash.

1. Quick setup

Perhaps the greatest advantage of using cash advances is that they can be obtained very quickly. An MCA can be secured within a few days, and often in less than a week. This quick turnaround can help if you have a serious cash need and have no other options. Cash advances can also be very useful if you have an incredible opportunity with a short deadline – such as buying heavily discounted assets.

2. Easy to get

Getting this type of funding is relatively easy, and cash advances have very high approval rates. Usually, all you need to submit is an application, a government ID, and a few months of business bank statements. Keep in mind that some funding companies may require additional documentation.

3. Perfect credit is not needed

Most cash advance companies check your personal credit as part of their review process. However, perfect credit is not required. This feature can be important for business owners who have little or no credit information.

4. No upfront collateral

One important different between an MCA and a line of credit is that the cash advance company does not require upfront assets as collateral. While the finance company does take a lien against all (or most) of your company assets, you do not need to have high assets to get funded. The main requirement is to have a good sales track record and a strong potential for future sales.

Get Financial Advice

Cash advances can provide many benefits. However, like any financing product, they can create problems if used incorrectly. Given how these transactions are funded, consider getting financial advice from a CPA to determine if this is the right solution for your company. Ideally, consider this product only if you are certain that it will improve your sales, and only if you will be able to repay it.

Note that this article does not intend to provide financial advice. Consider getting advice from a competent and licensed professional.

Alternatives to Cash Advances

Before signing on to any type of financing program, consider all other alternatives. Two options to consider if you are looking for a cash advance include:

1. SBA Microloans

The SBA offers Microloans – a great product for small business owners. Microloans can range up to $50,000 and are much easier to get than conventional loans. This solution is available to owners with bad credit as well. What makes these loans very attractive is that they come bundled with management and financial classes from the SBA. This assistance makes Microloans an ideal option for many small business owners.

2. Invoice factoring

One problem for many small business owners is that they have to sell their products and services on net-30 terms. Many owners can’t afford to wait 30 to 60 days to get paid by their commercial clients. You can solve this problem by factoring your invoices.

Factoring gives you an immediate advance against your slow-paying invoices. This advance improves your working capital immediately. Factoring lines are flexible and can increase as your sales grow. Learn more about merchant cash advances vs. factoring.

Looking for financing?

We are a leading provider of invoice factoring, an alternative to merchant cash advances. For a quote, fill out this form or call us toll-free at (877) 300 3258.


Note: We do not offer business cash advances. This article should not be considered financial advice and is provided for informational purposes only.