How a Merchant Cash Advance Can Boost Your Business

Updated November 23, 2021

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A merchant cash advance or MCA is an alternative finance product offered to businesses through a financing company. It usually involves the finance company providing an upfront, lump-sum cash advance to a merchant in return for a fixed amount to be repaid as a percentage of future credit card sales. Repayment is expressed as a total, fixed amount due to the MCA provider. The term and periodic amounts (repayment schedule) is presented to the merchant by the MCA provider.

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Before taking a merchant cash advance, borrowers should consider the terms carefully, an MCA could be very costly. MCA’s are best suited for companies that have a significant volume of credit card and debit card sales and project that those sales will remain steady or increase as a result of taking a cash advance.

When it comes to business financing, the options sometimes seem confusing. For many entrepreneurs, cash flow remains a constant struggle. A merchant cash advance can provide a quick boost of capital when you need it most but should be the choice of last resort in most cases. Below we’ll review the benefits and pitfalls of an MCA.

The Mechanics of a Merchant Cash Advance

An MCA agreement is fairly straightforward, but it’s vitally important to understand the terms of your agreement. MCA’s are financial arrangements that provide funds without many of the standard credit checks and other paperwork required by more traditional business loans. The MCA provider will generally look at your monthly credit/debit card sales, your sales history, agree to advance your company a percentage of that monthly amount and will present a predefined amount for repayment, including principal and finance fees.

Repaying Your MCA: What to Expect

An MCA is typically paid back in one of two ways. First, repayment will be made directly from your credit card and/or debit card merchant account. The finance company will typically take installment payments directly as a percentage of charges from your card processing merchant account in real-time until the amount is paid off. So, it’s important to note that this will affect your cash flow. Since the amounts are based on sales volumes, the amounts that you pay each time will fluctuate. The more you sell, the more you pay, the less you sell, the less your payment will be.

The second method of repayment is typically made through fixed daily or weekly ACH payments from your bank account to the finance company. In this case, you know the exact amount of your daily, weekly, or monthly payment.

How MCA Finance Charges Are Calculated-What is Factoring?

There is a difference between interest rate and factor rate. An MCA repayment schedule is a predefined repayment agreement that determines the total cost of the cash advance and the terms of repayment. Unlike a conventional loan that carries an annual percentage rate, MCA costs are determined by something called “factoring”. Factor rates typically range from 1.2-1.6 and are expressed as decimals and not percentages (like interest rates).

For example, let’s say your business needs $50,000 to purchase new equipment and you have approximately $62,500 in monthly credit card sales. Your MCA provider offers a factor rate of 1.3 and 12 months to repay and will deduct 10% of monthly credit card sales for repayment. You would then multiply the amount of the advance ($50,000) x factor rate (1.3) to arrive at a total repayment figure of $65,000 to be repaid over 12 months ($50,000 x1.5 = $75,000)/12 = $6,250 per month repayment figure.

Example of Merchant Cash Advance Cost Using Factoring

Factor Rate

Amount of Advance


Total Cost





Example of Repayment of MCA

Monthly sales

% of monthly sales uses to repay the advance

Monthly draw used to repay total cost

Months to repay





This assumes that your sales are steady and the repayment assumptions are projections based on your company’s sales history. However, if your sales decrease, you will take longer to repay the advance. Conversely, if your sales increase, you will pay off the advance sooner.  In the event that you take longer to pay, you may incur additional fees depending on your agreement, so it’s important to take this into consideration.

“The costs associated with MCA factoring differ from conventional loan interest rates or annual percentage rate (APR) in that with MCA factoring, the cost of capital is predetermined and generally fixed. With a conventional loan that uses APR, interest rate (or cost of capital borrowed) is calculated on the principal balance”, explains Robert Kleiber, Chief Operating Officer at iCapital Funding.

Your factor rate will be based on your company’s ability to repay the cash advance and is determined by the MCA provider and includes your monthly sales, length of time in business, and consistency of sales over time.

Keep in mind, there is no benefit to paying off an MCA early. This is because the costs (financing fees) are predetermined and fixed. Using the example above, let’s say your sales increase dramatically and you are able to pay off the loan in 6 months rather than 12. If we convert the cost of capital to a percentage, you would have paid 30% in interest equivalent over 6 months. That translates into 60% when annualized.

How a Merchant Cash Advance Can Help Your Business

An MCA is a useful way to get access to quick capital in times of immediate financial need…or opportunity. Since it is relatively costly and will draw from future cash flow, it’s best used for projects that will increase sales and cash flow substantially over the repayment period.

This type of loan is generally used for business owners or managers who need capital to:

  • Expand production output
  • Hire more employees to handle business growth
  • Purchase goods and services to meet increasing demand
  • Or, most expansion-related expense

A good rule of thumb when considering an MCA is to determine whether the additional capital will increase top-line sales. Remember, an MCA will be a drag on future cash flow, be sure that the money is used to make a commensurate increase in sales to compensate.

How to Qualify for a Merchant Cash Advance

The qualification process is usually based on three main factors: revenue history, time in business, and monthly credit card sales. In some cases, you may be asked to personally guarantee the cash advance.

To qualify for a merchant cash advance, you’ll need to provide the following information:

  • 1-3 years of business banking records
  • An explanation of how long you’ve been in business 
  • Credit card processing records for past year
  • 1-3 years of business tax returns

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