If you’re exploring alternative business funding, you’ve likely come across the term merchant cash advance (MCA). This article will dive into the merchant cash advance pros and cons so you can decide if this type of financing fits your business.
We’ll cover what an MCA is, how it works, the advantages, the drawbacks, key questions to ask, and how it stacks up against other funding options. By the end, you’ll have a clearer picture of when it makes sense — and when it doesn’t.
A merchant cash advance is a financing arrangement where you receive a lump-sum payment upfront in exchange for giving the advance provider a percentage of your future sales.
It is not always structured like a standard loan. Instead, you’re selling a portion of your future receivables or card sales.
Here’s a simplified breakdown:
You apply to an MCA provider and share your recent sales history (often credit/debit card transaction data).
The provider offers you a lump sum based on your expected future sales.
You accept the advance, and the provider agrees on a factor rate (a multiplier of the advance amount you’ll pay back) or hold-back percentage.
You repay automatically by giving a set percentage of your daily/weekly credit or debit card sales until the total owed (advance + fee/factor) is fully paid.
Say you get a $50,000 advance with a factor rate of 1.3. That means you’ll ultimately repay $65,000 ($50,000 × 1.3). Repayment happens via a percentage of your daily card sales.
They’re fast: MCAs can be funded in days compared to weeks for bank loans.
They require less collateral and often less stringent credit checks.
They work for businesses with flexible cash flow — when payments tied to sales make sense.
Here’s a detailed look at the merchant cash advance pros — the benefits you’ll want to weigh.
Because MCAs are approved and paid out faster than traditional business loans, they’re a go-to for urgent funding needs. For example, you may need inventory for a seasonal surge or to cover sudden repairs.
Since repayments are often a percentage of daily or weekly sales, when your business has a slower day, you pay less. In busier times, you pay more — helping align payments with cash flow.
You generally don’t need perfect credit or heavy collateral. Many MCA providers look more at your sales history than your credit score.
Because you’re agreeing to pay via future receivables, many MCAs don’t require you to pledge equipment or property as collateral — reducing risk to your other assets.
If your business has peaks and valleys (retail, hospitality, restaurants), the variable repayment structure may be a better fit than fixed monthly loan payments during slow periods.
Now we flip the coin — here are the merchant cash advance cons you must consider.
MCAs can be significantly more expensive than traditional loans. Because you’re essentially “selling” future revenue, the effective annual percentage rate (APR) can be extremely high. SoFi+1
Even though repayments are tied to sales, when you owe a substantial hold-back (e.g., 10-20% of daily card receipts), it can squeeze your margins and limit flexibility. pipe.com
Unlike bank loans, MCAs often operate in a less regulated space — meaning you may encounter hidden fees, unclear terms, or aggressive collection practices. For example, some providers have faced legal action for predatory behavior.
Because the structure is based on future sales rather than a standard amortizing loan, paying it off early often won’t reduce the total amount you owe.
If you hit a slow season or your card sales drop, you might be stuck paying a high percentage of limited revenue — potentially limiting your ability to invest in operations or growth.
Consider an MCA if:
You need funds quickly and don’t have time for a long bank application process.
Your business has consistent credit/debit card sales and you can handle a portion being withheld.
You can’t access traditional bank financing due to credit history, collateral shortage, or time constraints.
You’re using the funds for a short-term or seasonal need that will generate revenue soon (e.g., inventory, marketing push).
Avoid or proceed with caution if:
Your business has thin or unpredictable card sales, making the percentage payment burdensome.
You need funding for long-term expansion where a more traditional loan with lower cost makes sense.
You plan to rely on the funds for core expenses long-term, because high cost and repayment structure may limit flexibility.
You don’t fully understand the factor rate, hold-back percentage, and fees in the contract.
Before you commit to a merchant cash advance, ask the following questions:
What is the factor rate? How much will I owe total compared to the amount received?
What is the hold-back percentage (the percentage of card sales withheld daily or weekly)?
Are there daily or weekly repayment terms, or fixed installments?
What fees are included (origination fees, admin fees, processing fees)?
What happens in a slow-sales period? Does the payment drop accordingly?
Can early repayment reduce the total cost?
Are there prepayment penalties or additional fees if I pay early?
Is the provider regulated or does the agreement comply with local lending laws?
What’s the impact on cash flow? Will withholding (e.g., 10-20% of daily sales) affect operations?
To maximize the benefits and minimize risks of a merchant cash advance, follow these best practices:
Only borrow what you can repay comfortably — model out how daily/weekly repayments affect your operating budget.
Use the funds for revenue-generating purposes, not just to plug a cash-flow leak indefinitely.
Ensure you have reliable card sales (or receivables) that support daily deductions without starving your business.
Shop around — compare factor rates, fees, hold-back percentages, and read contracts carefully.
Explore alternatives (see next section) before committing — MCAs should often be a last-resort rather than first.
Maintain strong accounting — track the deduction amounts, reconcile with what you expected and understand impact on net income.
Have an exit strategy — plan how the advance will be repaid and how your business will resume normal financing or cash flow once it’s done.
If you decide an MCA might not be ideal, here are some common alternatives with their pros and cons:
Small business loan (from a bank or credit union) — lower cost, predictable payments, but slower approval and tougher criteria.
Business line of credit — flexible access to funds as needed; interest charged only on what you use.
Invoice factoring or receivables financing — useful if your business invoices customers and waits on payments.
Equipment financing — ideal when you need to buy specific equipment and can use it as collateral.
Revenue-based financing (RBF) — similar to MCAs but often structured for longer-term growth ventures.
Choosing the right financing depends on your business model, cash-flow pattern, credit profile, and urgency of funding.
When evaluating an MCA provider, conduct due diligence:
Check provider reputation and look for any complaints or legal actions (e.g., predatory lending claims).
Demand full disclosure of factor rate, total repayment amount, and payment schedule.
Ensure your contract clearly states the hold-back mechanism, whether daily/weekly and how it works.
Verify how repayments are deducted (from card processor or bank account) and how that impacts you on slow days.
Understand whether the agreement is really a sale of receivables or labelled a loan — this distinction may affect your rights.
Ask what happens if you close your merchant account or move to a different processor.
Consult your accountant or lawyer to understand tax implications — MCAs may not be treated the same as loans.
Imagine you run a boutique retail store. Your average monthly card sales are $40,000. You hit a sudden opportunity — a holiday stock surge — but you need $30,000 now to purchase inventory. Your bank loan will take at least 3 weeks; you risk missing the trend.
Here’s what you might evaluate:
Apply for an MCA of $30,000 with a factor rate of 1.3 → you’ll repay $39,000.
Hold-back is set at 15% of daily card sales. That means roughly $6,000/month (if you maintain ~$40k/month in sales), so you could repay in ~6.5 months.
During spring (slow season), your sales drop to $20,000 — your repayment drops to ~$3,000/month. But because of slower repayment, the effective APR may rise.
You must ensure the inventory you buy will reliably sell and generate enough margin to support the repayment.
In this scenario, the MCA gives rapid access, but the high costs and repayment structure dictate that the inventory must generate the needed revenue. If things go sideways (slow sales, margin pressure), the high cost becomes a burden.
In summary:
Merchant cash advance pros include fast access to funds, flexible payments tied to sales, less reliance on credit and collateral, and usefulness for businesses with variable revenue.
Merchant cash advance cons include very high cost, potentially heavy impact on cash flow, limited regulation, and minimal benefit for early repayment.
Before moving forward, evaluate your business’s sales stability, margin strength, ability to absorb daily/weekly repayments, and whether the funds will be used for a return-generating purpose, not just to stay afloat.
If your business qualifies and you need fast access to cash — and you accept the cost — an MCA may be a viable tool. But if you have time, strong credit, and lower cost options, a traditional loan or line of credit may serve you better long-term.
A merchant cash advance (MCA) is not a typical loan — you receive cash upfront and repay by surrendering a portion of future card sales.
Key benefits: fast funding, flexible payment tied to sales, easier access for those with less credit or collateral.
Key drawbacks: high total cost, risk to daily cash flow, less regulatory oversight, little benefit from early payoff.
Use MCAs for short-term, revenue-generating needs when speed matters. Avoid them for long-term funding where cheaper alternatives exist.
Always review the contract in detail: factor rate, hold-back percentage, fees, repayment mechanism, and legal terms.
Evaluate alternatives and make sure the financing supports — not undermines — your business’s cash flow and growth.
If you’re considering a merchant cash advance, don’t decide in a rush. Download our free funding comparison worksheet to evaluate MCAs versus other options like business loans or lines of credit. Then schedule a consultation with a trusted financial advisor who understands small business funding. Your next step: make sure you choose an option that fuels growth — not drains your cash flow.