Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Personal Finance Debt Relief What Is a Merchant Cash Advance? How It Works Updated Jul 21, 2025 9-min read Written by Catherine Collins Written by Catherine Collins Expertise: Budgeting, Mortgages, Credit, Debt, Personal loans, Small business, Entrepreneurship Learn more about Catherine Collins I know many entrepreneurs who have used business financing to keep the lights on, hire staff, manage cash flow, and fuel growth. A merchant cash advance (MCA) is one type of business financing that offers quick funding with fewer approval requirements than other types of business loans. However, it comes with a cost. MCAs are a largely unregulated industry, and the fees are exorbitant. Sometimes this puts entrepreneurs in worse financial shape and starts a debt cycle that’s hard to escape. Below, I explain exactly how MCAs work, important information about fees, alternatives to consider, and how to get out of one if you need to. Table of Contents What is an MCA? How does it work? Requirements Factor rates Pros and cons How do I get out of an MCA? Find reputable lenders Alternatives FAQ How do you sell MCAs? What happens if you default? Is an MCA structured like a loan? What is a merchant cash advance? A merchant cash advance is a type of business financing that takes a portion of your future sales as repayment. If you take one out, you’ll get a lump sum, and your MCA lender will automatically take a percentage of your sales each day until you’ve repaid the loan plus the lender’s fees. Lender fees can be equivalent to 350% interest or more. Despite these high fees, the global market for merchant cash advances is growing, fueled by business owners looking for alternative financing options. The MCA market is currently valued at almost $18 billion, with growth projections showing it will reach nearly $33 billion by 2032. How does an MCA work? An MCA business or someone who is an MCA broker will contact small businesses and offer financing as a solution to cash flow issues. You can also apply for one yourself if you want an alternate form of business financing and don’t qualify for traditional business loans. Each MCA agreement is different, so it’s important to read the fine print. Most MCA lenders require business owners to give direct access to their business bank account, which the lender uses to collect payments. Your agreement will stipulate the percentage of sales your lender can take each day. The most appealing part of a MCA is how fast business owners can get cash. These loans are usually approved in one to two days, whereas other types of business loans, such as a business line of credit or an SBA loan, can take weeks to process. Requirements Each MCA lender has unique requirements. Some requirements might include a minimum number of monthly transactions, a specific number of years in business, a certain level of annual revenue, and even a minimum personal credit score. Merchant cash advance factor rates MCAs are so expensive because merchant cash advance lenders calculate fees using factor rates, not interest rates. Factor rates look like a number or a number with a decimal, like 1.09 to 1.50. It’s meant to be a straightforward calculation, but when converted to interest rates, it can be 50% APR or more. Interest rates above 30% are illegal in many states due to something called usury laws, but MCAs are not technically loans, so lenders can charge high fees and use factor rates to calculate what borrowers pay. How are factor rates determined? Every lender is different. Typically, your factor rate will be based on the amount you borrow, how many years you’ve been in business, your annual revenue, and creditworthiness. Factor rate example Here’s an example of how to calculate your merchant cash advance fees using a factor rate. It’s important to run the numbers before agreeing to an MCA. Lenders typically focus on the low percentage you’ll pay from your credit card sales because that sounds better than taking out a loan with a sky-high interest rate. Here is a calculation to help you determine the actual interest you’d pay for an MCA loan. Example: A $25,000 merchant cash advance with a 1.3 factor rate and a 12-month repayment period. Step 1: Calculate the total you’ll repay by multiplying the cash advance by the factor rate. $25,000 x 1.3 = $32,500 You will pay a total of $32,500 back to the MCA lender. Step 2: To find out how much your MCA fee is, subtract the amount of your MCA from the total. $32,500 – $25,000 = $7,500 Your fee to borrow $25,000 will be $7,500. Step 3: To find your APR, divide the fee by your MCA amount, and then divide that number by the term in years. ($7,500 / $25,000) / 1 = 0.3 or 30% In this example, a 1.3 factor rate on $25,000 for a one-year term is equivalent to a 30% APR. If your MCA loan had a shorter term, like nine months, the APR would be even higher. You’d divide by 0.75 (because your repayment period is 3/4 of a year): ($7,500 / $25,000) / 0.75 = 0.4 or 40% This shows how shorter repayment periods result in a higher APR, even if the fee stays the same. It’s important to consider the fee and the repayment timeline when comparing financing options. Pros and cons Pros Most business owners get fast funding Flexible repayment based on a percentage of sales No collateral required Less stringent approval requirements than many other financing options Cons One of the most expensive types of business financing Not federally regulated (higher potential for dishonest lenders) Repayment can disrupt profits until you repay what you owe High borrowing fees Factor rates make it harder to understand how much interest you’ll pay In case of non-payment, provider may pursue repayment through collections, legal action, or by freezing business bank accounts How do I get out of a merchant cash advance? If you want to get out of a merchant cash advance, you can take several. First, call the company and ask whether you can restructure the loan and make the payments more affordable. Also, consider liquidating your business assets, like equipment, real estate, or intellectual property to pay off your debt. If you still need help and can’t consolidate your debt with a different type of business loan, you can use the services of a debt relief company—National Debt Relief is our top pick—or an attorney who specializes in helping business owners settle MCA debt. How to find reputable lenders Some MCA companies prey on desperate business owners who need a cash infusion. In 2025, the New York attorney general won a $1 billion+ case against Yellowstone, a company that gave predatory loans disguised as MCA loans. In sum, much better business loans may be available—loans that don’t charge the exorbitant fees MCAs do. However, recently, a friend of mine who owns a wellness center took out a business loan with Square. At first, I panicked when I learned Square deducts a portion of his business’s credit card sales. However, upon researching it for him, I found that even though it was structured like a typical MCA loan, Square’s interest rates were lower than other MCAs. Anecdotal evidence from Reddit (below) shows several other business owners have used Square for this purpose. In short, only use a MCA if you are ineligible for a bank loan or SBA loan. Make sure the MCA you use has low fees that won’t disrupt your business cash flow or your ability to provide for yourself and your employees. Otherwise, it’s not worth the stress and high cost. Shout out for Square and Square Loans byu/alien_mermaid inrestaurantowners Alternatives MCAs aren’t the only way to fund your business. Here are a few other options to consider. Traditional business loans You can apply for a typical business loan from a bank and the U.S Small Business Administration. Last year, the SBA issued more than 100,000 loans to small businesses. SBA loans and bank loans have more stringent requirements than merchant cash advances and can take longer to fund. However, they have better terms and interest rates than MCAs. Personal loans Personal loans are tied to your credit, versus your business’s credit, but this is another option to consider if you need cash. Some lenders on our list of best personal loans that offer up to $100,000 (Credible even works with a lender that offers up to $200,000!) in financing. The drawback is that defaulting on your loan can hurt your personal credit score, but personal loan interest rates can be lower than MCA fees if you have fair, good, or excellent credit. Cash advance apps Several reputable cash advance apps can help you if you need same-day funding. These are tied to your personal bank account, not your business bank account, so you’ll need to show evidence of regular monthly paychecks to get one. However, you can only borrow a small amount, and some come with high fees. FAQ How do you sell merchant cash advances? If you’re interested in selling merchant cash advances as a business or profession, you need to understand the requirements, so you know how to find clients. You get a commission based on the business’s ability to pay back the cash advance, but the risk is that a borrower will default on the loan. Generally, this type of business suits people with a strong sales background. Here is a recent Reddit thread with advice on how to successfully sell MCA loans: How to Sell Merchant Cash Advances: 7 Proven Strategies (Courtesy of MCA LEADS PRO) byu/Intelligent_Draw_139 inMCAlegend What happens if you default on a merchant cash advance? Defaulting on a merchant cash advance (MCA) can trigger serious consequences. Since most MCAs require a personal guarantee, the provider may pursue repayment through collections, legal action, or by freezing your business bank accounts. Some contracts include a confession of judgment clause, which lets the lender obtain a court judgment without a trial. Default can also damage your credit and business reputation, making it harder to qualify for future funding. If you’re struggling to repay an MCA, contact the provider immediately to discuss restructuring or hardship options. Is an MCA structured like a loan? Not exactly. A merchant cash advance is technically not a loan. Instead, it’s an advance on future revenue, usually credit card or debit card sales. The provider gives you a lump sum in exchange for a percentage of your future sales or fixed daily or weekly withdrawals from your business account. Since repayment is tied to your sales volume, MCAs are considered a flexible option for businesses with inconsistent income, but they come with high costs and strict terms that can be risky if cash flow drops.