A merchant cash advance gives a business a lump sum in exchange for a fixed share of future sales, usually repaid through a daily or weekly debit or a percentage of card receipts. The total cost is set by a factor rate, not an interest rate, so the true annual cost depends on how quickly the advance is repaid. For example, a 1.25 factor on a $20,000 advance means repaying…
What a merchant cash advance actually is #
A merchant cash advance, often called an MCA, is a way to get cash quickly against money your business will earn later. The funder gives you a lump sum up front. In return, you agree to pay back that sum plus a fixed fee, collected as a share of your future sales.
The arrangement is usually structured as a purchase of future receipts rather than a loan. Its cost is quoted as a factor rate, such as 1.25, rather than an interest rate. A 1.25 factor over about eight months is roughly 65–75% APR-equivalent, so it should be compared the same way you would compare any borrowing. Many owners still treat it like a loan, and that is a reasonable way to think about it, as long as you convert the cost before comparing it.
An MCA has no fixed monthly payment and no set end date in the usual sense. Payments rise and fall with your sales, so a strong month repays faster and a slow month repays more slowly.
Step by step: from application to funding #
The process is simpler than a bank loan, which is one reason owners choose it.
- Apply with recent business data. Most funders ask for three to six months of bank statements, and sometimes card processing statements. They look mainly at how much money comes in and how consistently.
- Receive an offer. The offer states the advance amount, the factor rate, the total payback amount, and how the repayment will be collected.
- Sign and provide account access. You sign an agreement and usually authorize automatic debits from your business bank account, or arrange a holdback on card sales.
- Receive the funds. Once documents are complete, funding can arrive within days.
- Repay through sales. Each debit or holdback takes a fixed share of sales until the total payback amount is reached.
Read the agreement before signing. Pay attention to the total payback amount, the collection method, any minimum payments, and what happens if you want to close the advance early.
How repayment works: factor rates and holdbacks #
There are two common collection methods.
Fixed daily or weekly debit. The funder takes the same amount from your bank account on a set schedule, such as every business day. The amount is set when you sign, based on the expected repayment period.
Holdback on card sales. The funder takes a fixed percentage of your card receipts before the money reaches your account. This is sometimes called a split. Because it follows your sales, the payment rises and falls with them.
In both cases, the total you repay is fixed at signing. The factor rate multiplies the advance to produce that total. A 1.20 factor on $50,000 means repaying $60,000. A 1.35 factor on the same advance means repaying $67,500. For example, if each were repaid over about eight months, the 1.20 factor works out to roughly 60% APR-equivalent and the 1.35 factor to roughly 105% APR-equivalent. The factor does not change because you repay early or late. What changes is the annual cost, which is covered in the next section.
Converting the factor rate to an APR-equivalent #
A factor rate can look small, but it is not comparable to an interest rate until you convert it. Here is the method for the example in the summary.
- Advance: $20,000
- Factor: 1.25
- Total repayment: $25,000
- Cost of the advance: $5,000
To estimate an annual rate, divide the cost by the average balance you owe over the repayment period, then scale to a year. Because you pay down the balance as you go, the average balance is closer to half the advance than the full amount.
- Average balance over eight months: about $10,000
- Cost for that period: $5,000 ÷ $10,000 = 50%
- Scaled to a year: 50% × (12 ÷ 8) ≈ 75%
The range of roughly 65–75% reflects how quickly the balance actually falls in practice. The same method shows how much the repayment period matters. For example:
| Repayment period (same $20,000 at 1.25) | Estimated APR-equivalent |
|---|---|
| 4 months | about 150% |
| 8 months | about 65–75% |
| 12 months | about 50% |
These figures are estimates for illustration, not quoted rates. Ask any funder for the total payback amount and the expected term, then run the same calculation before you compare offers.
What it costs compared with a bank loan, SBA loan and line of credit #
Each option prices money differently, so compare them by total cost and by how long the money stays with you. Interest rates on loans are quoted as APR, which already includes the annual cost. Factor rates are not, so use the conversion above when comparing.
| Option | Typical cost | Speed | What it needs |
|---|---|---|---|
| Bank term loan | Interest rate set by credit, term and collateral; quoted as APR | Often several weeks | Established business history, strong credit, financial statements, sometimes collateral |
| SBA 7(a) loan | Interest rate capped by SBA rules and usually tied to a base rate; quoted as APR | Often one to three months | Business history, credit review, detailed documentation, usually a personal guarantee |
| Business line of credit | Interest on the amount drawn; quoted as APR, plus any fees | Days to a few weeks once approved | Time in business, revenue, credit profile |
| Merchant cash advance | Factor rate on the advance; roughly 50–75%+ APR-equivalent for shorter terms, as shown above | Days | Consistent card or bank deposits, recent statements |
| Revenue-based financing | Fixed fee or multiple of funds, tied to a share of monthly revenue; convert to an APR-equivalent before comparing | Days to a few weeks | Monthly revenue history, sometimes accounting software access |
Speed and cost move in opposite directions in most cases. The fastest options are usually the most expensive per dollar, and the cheapest options usually take the longest and ask the most of your records and credit.
What is the difference between a merchant cash advance and a loan? #
A merchant cash advance is generally structured as a purchase of future sales rather than a loan. It has no fixed term or interest rate, and its cost is set by a factor rate. A bank loan has a fixed repayment schedule and an interest rate quoted as APR. Both are ways to get money now and repay later, so compare total cost and repayment pressure, not just the label.
Is a merchant cash advance a loan? #
It is generally not classed as a loan in legal terms, because the funder buys a share of your future receipts. Practically, though, it is still borrowed money with a cost. Check your state's disclosure rules and read the contract's total payback amount.
How is a merchant cash advance repaid each day or week? #
Repayment is collected either as a fixed debit from your business account on a set schedule, or as a percentage of card sales before the money reaches you. The total owed is fixed at signing. Daily or weekly payments change only if the method is a holdback on card sales, in which case they follow your revenue.
What does a factor rate mean in dollars and in APR terms? #
A factor rate multiplies the advance to give the total you repay. A 1.25 factor on $20,000 means $25,000 back, or $5,000 in cost. Convert that cost into an annual rate by dividing by the average balance over the repayment period and scaling to a year. Over about eight months, that is roughly 65–75% APR-equivalent.
What happens if my sales drop while I am still repaying? #
With a holdback or a percentage-based debit, your payments fall when sales fall, which eases cash pressure. The total you owe does not fall. The advance simply takes longer to repay. Read the contract for minimum payments, default triggers and any reconciliation terms, because some agreements set a floor.
When is a bank loan or SBA loan the better choice? #
A bank term loan or SBA 7(a) loan is usually the better choice when you have time to apply, a documented history of profit, and credit that qualifies. The lower annual cost can save a large amount over the life of the loan. It also makes sense for long-term investments, such as equipment or buildings, where you need a predictable repayment schedule.
When it fits — and when it doesn't #
A merchant cash advance can fit when you need cash within days, your card or bank deposits are steady, and the expected return on the money is higher than the total cost. It can also work as a bridge for a short, clear need, such as inventory for a confirmed order.
It is usually the wrong tool when you need to borrow for a long period, when you could qualify for a bank or SBA loan in the time you have, or when your sales are uneven enough that a fixed daily debit would strain cash flow. In those cases, a bank term loan, SBA 7(a) or line of credit is the better choice, even if it takes longer.
Before you decide, run the APR-equivalent calculation on any offer, and compare it with what a bank or SBA lender would charge for the same amount and term.
Ready to see what you qualify for? Start your request through the TermLantern application page.
This explainer is general information, not advice for your situation. The terms that apply to you are only those in an agreement you sign. How this site is paid.