What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a form of financing that allows a company to sell a portion of its future sales in exchange for an immediate payment. This financing provides your company with funds to pay operational expenses and to grow. There are a few ways to repay the financing line, depending on your type of business.

Initially, merchant cash advances were used solely to finance future credit card sales. Therefore, most clients were retailers and restaurants. The product has evolved to the point where cash advance companies can finance any future sales, regardless of how they are paid for.

How do Merchant Cash Advances Work?

Most merchant cash advance companies consider their transactions to be a purchase of future sales rather than a loan. To determine how much funding to provide, finance companies review your credit card sales, commercial sales, banks statements, and other information. These reports provide them with sales performance information, which gives them an idea of your future sales potential.

a) Determining the funding amount

The amount of funding is determined by a combination of your sales and the perceived risk of your account. Most cash advance companies advance anywhere from 80% to 150% of your average monthly revenues based on these parameters.

The amount you must repay is determined by multiplying your financed amount by a “return factor.” The return factor can range from 1.09 to 1.50. For example, a $100,000 transaction with a payback factor of 1.09 would require repayment of $109,000 over a period of time. Usually, the payback period ranges from 3 months to 15 months.

The actual funding part of the transaction is relatively simple. The funds are deposited to your account once the financing is approved.

a) Paying back the funds

Your company can repay the funds to the cash advance company in a number of ways. If you funded credit card sales, your company pays the finance company back through a percentage of its daily sales. This percentage, known as the “retrieval rate,” can range from 8% to 13% of your daily sales. It’s paid back by implementing split processing with your credit card processor.

If you are not financing credit card sales, repayment happens by allowing the cash advance company to deduct funds from your bank account via the ACH system (direct withdrawal). For this reason, some merchant cash advances are also referred to as ACH loans (or simply ‘cash advances’). Although most finance company debit your account every business day, some do so on a weekly basis.

Disadvantages/Advantages of Merchant Cash Advances

Merchant cash advances have some disadvantages. The main disadvantage of this solution is the cost of financing. As discussed in the previous section, this solution is expensive. As a result, companies should use this product only after careful consideration – and only if they are able to grow the business and pay the lender back.

Companies can run into serious problems if they aren’t able to pay the cash advance back. If this happens, small businesses often resort to getting a second cash advance. They hope use the new cash advance to meet the payment obligations of the first advance, and to run the business. Unfortunately, doing this only pushes the problem to the near future.

This situation often repeats itself. This causes the business owner to get a new advance to pay off the previous ones. You can see where this is heading. Having multiple cash advances is called ‘stacking’ and is very risky. It often leads to serious financial problems – or business failure. The only solution to this is to pay off the open cash advances – either by consolidating them through a better facility or by some other means. The best option is to avoid this situation altogether.

Another disadvantage of cash advances is that they have a fixed value – like a term loan. A fixed value product is usually not the best solution to solve cash flow problems. If you have cash flow problems, an MCA may provide a short-term solution, but you will probably need to refinance the line a few times. Generally, cash flow problems are best solved using revolving financing, such as a line of credit.

However, this product has some advantages. Most cash advances can be obtained quickly, in just days. Also, qualifying for a merchant cash advance is much easier than qualifying for a business loan. These advantages can make an MCA an attractive solution if your company has an urgent need for funding.

Given the potential advantages and disadvantages of this solution, consider speaking with an accountant or similar expert to ensure you make the right decision.


There are some alternate solutions that can provide funding to small and growing businesses. Consider evaluating these and other options before making a final decision. Two popular small business financing alternatives include:

a) SBA Microloans

The SBA offers Microloans of up to $50,000 to small business owners. Microloans are easier to get than conventional bank financing and do not require good credit. Microloans often come bundled with financial consulting and management workshops, which can be ideal for small business owners. Microloans are available to companies that sell to retail and/or commercial customers. This alternative is highly recommended.

b) Invoice Factoring

Invoice factoring is a type of financing that can be used by companies that sell products and services to other companies. Commercial sales are often done on net-30 to net-60 day terms, which can create cash flow problems. Factoring your invoices provides you with an immediate advance which can be used to pay for business expenses.

Most factoring programs operate like revolving lines of financing. They are tied to your sales and increase as your sales grow. Learn more about factoring vs. business cash advances.

Looking for business financing?

We are a leading provider of factoring, an effective alternative to merchant cash advances. For information, 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.