What Merchants Should Know About Cash Advances

A merchant cash advance (MCA) is not technically a loan, and that distinction matters more than it sounds. Instead of fixed monthly payments, a provider advances a lump sum against future card sales and collects repayment as a fixed percentage of daily card revenue until the advance, plus a fee, is paid off.

Where an advance genuinely helps

Because repayment scales with sales, an MCA can be a reasonable bridge for seasonal inventory buys, an unexpected equipment repair, or a short gap before a larger receivable comes in, especially for a business that does not qualify for a traditional bank line of credit. Approval is typically fast, often within a day or two, based on processing history rather than a credit application.

Where it gets expensive

The cost of an MCA is usually expressed as a factor rate, for example 1.2 to 1.4 times the amount advanced, rather than an annual percentage rate. Translated into an effective APR, that factor rate can land well above what a bank loan or line of credit would cost, sometimes significantly so, particularly if the advance is repaid quickly. Because repayment is a percentage of daily sales, a slow sales period stretches out the repayment period and the total cost, rather than reducing it.

Questions worth asking before signing

Ask for the total dollar cost of the advance, not just the factor rate, and calculate what that implies as an approximate APR. Ask how the daily repayment percentage is calculated and whether it adjusts if sales drop. And ask whether there is a prepayment discount, since not all providers offer one.

If cash flow timing rather than a lump-sum need is the actual problem, faster settlement on everyday processing can solve it without taking on advance-style financing at all. See Payment Processing for how our settlement timelines compare.