As a kid, did you ever ask your parents for an advance on your allowance? Maybe there was a hot new toy coming out and you absolutely had to have it the first day it was on store shelves. Not one day later.

Unfortunately, that day was a week before your allowance payday! Assuming you did chores in exchange for your allowance, your parents were lending you money for chores you had not yet completed.

You probably didn’t say, hey mom and dad, I need some short-term working capital to be the coolest kid on the block with the latest toy.  But you could have. As a business owner today, you could get a merchant cash advance.

What Is a Merchant Cash Advance?

The fast pace of our economy requires business owners to react to changing market conditions in a matter of days – not weeks or months. Reacting to customer demands quickly often requires a healthy amount of short-term working capital.

If you don’t have working capital available to you, meeting increased customer demand quickly can be tough. And if you don’t meet your customers’ demand, your competitors will!

You wouldn’t t be alone if that scenario sounds familiar. To meet this need, the alternative lending market offers merchant cash advances (MCA). These lenders are not banks but they do provide an alternative to traditional small business loans.

Merchant lenders advance cash to businesses based on the credit/debit card revenues of that business.

Important Concepts Understand with Merchant Lenders

A Factor Rate is a multiplier that determines what the total amount of your repayment will be. MCA lenders assign a factor rate based on how risky they think you are as a customer.

A factor rate of 1.0 would mean you only pay back exactly what you are advanced. That would be free money, so it never happens.

Low-risk customers get a factor rate closer to 1.0 and high-risk customers get a factor rates closer to 1.5. Factor rates are typically between 1.12 and 1.5.

Here are a few examples to give you a sense of how the factor rate sets the amount you will pay back to the MCA lender. Let’s say that you have an offer for a $50,000 advance with a factor rate of 1.1. This means your repayment amount will be $55,000. And so on:

  • With a factor rate of 1.2, your total repayment amount would be $60,000.
  • With a factor rate of 1.3, your total repayment amount would be $65,000.
  • With a factor rate of 1.4, your total repayment amount would be $70,000.
  • With a factor rate of 1.5, your total repayment amount would be $75,000.

Sometimes less experienced business owners think that the factor rate is like an interest rate. To be clear, a factor rate is not the equivalent of an interest rate. If it were, a rate of 1.5 sounds low, right? Read on and you will learn how to compare MCA costs with other types of loans.

A Retrieval Rate, also called a holdback rate, is the percentage of your daily credit/debit card sales you pay to the MCA lender toward your total repayment amount. The average retrieval rates are between 5 and 15 percent.

MCA lenders retrieve funds directly from your merchant processor on a daily basis until you’ve repaid in full. If the agreed-upon retrieval rate is 10 percent, and your daily credit/debit card receipts are $10,000, the MCA lender would deduct $1,000 from those proceeds.

How Does a Merchant Cash Advance Work?

In short, you promise a slice of your future credit/debit card sales for an immediate lump sum of cash.

Some businesses, like restaurants and retailers, regularly operate with limited working capital. It’s the nature of these industries. You might have limited working capital temporarily because one of your vendors increased prices or had a great opportunity to buy extra inventory.

While each merchant lender has its own application requirements, generally you can expect to submit the following to apply for an MCA:

  • Credit card processing statements
  • Valid driver’s license
  • Bank statements
  • Voided business check
  • Business tax returns
  • Permission to run a credit check

If you are approved by an MCA lender, you then sign a contract which includes the following information:

  • Amount of the advanced lump sum
  • Factor Rate
  • Retrieval Rate
  • Operating Restrictions (i.e. you can’t change merchant processors)

The amount of cash you get is based on your average monthly credit card sales. MCA lenders will review your merchant processing statements for the last 3 to 6 months. Based on these statements, advances could be anywhere between 50 and 250 percent of your monthly credit/debit card revenues.

Quick and Easy Example:

Let’s say you have monthly credit/debit card sales of $200,000 and you need $100,000 in short-term working capital.

You’re approved by an MCA lender and sign a contract agreeing to a factor rate of 1.30. This means you will pay back a total of $130,000. You also agree to a daily retrieval rate of 10 percent.

If your credit/debit card sales hold up at $200,000 a month, with 30 days in a month, that comes to about $6,666 in daily credit/debit card sales. You will pay 10 percent of $3,333 to the MCA lender or about $666 a day until you have repaid $30,000.

What Are the Advantages of a Merchant Cash Advance?

The choices we make have trade-offs. Choosing a merchant cash advance may have the following benefits:

  • Speed of application and funding
  • Unsecured meaning no liens on personal or business assets
  • No fixed repayment amount – so if sales volume changes, no default or penalties
  • Not considered a loan so doesn’t appear on credit report as outstanding debt
  • Limited paperwork
  • Use the money however you want-disbursements not monitored
  • Low credit scores are not a deal breaker
  • High approval rate
  • Won’t bring down credit score since not new debt on credit record
  • You can get smaller loans

Without a doubt, when you’re desperate for cash, the benefits of a merchant advance sound appealing.  Let’s take a look at the disadvantages of an MCA.

What Are the Disadvantages of a Merchant Cash Advance?

The biggest downside to a merchant cash advance is the cost. That can be a deal breaker if your business is already short on cash.


It is not uncommon for annual percentage rates (APR) of merchant cash advances to be in the triple digits. To put this context, imagine you’re watching t.v. and an advertisement for a dealership trying to sell you a new car at a 120 percent APR. That sounds pretty steep, right?

Before we dive into the details of cost, it is important that you understand how APR is defined. APR is the rate at which a lender charges a borrower over a 12-month period. By law, the rate must include all fees and interest charged to the borrower.

APRs for merchant cash advances can range from 40 to 350 percent,  depending on the lender and how long it takes you to pay back. Repayment typically ranges from 3 to 18 months.  About eighty percent of business owners take longer than they thought to pay back the merchant lender.

Quick and Easy APR Example:

You got a $100,000 advance at a factor rate of 1.2, making your total repayment $120,000. You pay this off in 140 days. The APR calculation would be:

$20,000 / $100,000 = 0.2

0.2 x 365 = 73

73 / 140 = 0.52142

0.52142 x 100 = 52.142

Your APR for this merchant advance would be 52 percent. Before you sign a contract, compare this to a lender that provides an APR in the contract. You can find small business lenders with APRs ranging from 10 to 30 percent.

Higher Sales Can Mean Higher APR

In the case of a merchant cash advance, higher sales may actually mean higher APR. Since your repayment rate includes fees, size of the advance, amount of your card sales, and how long it takes you to repay.

If sales are slow and it takes you 12 months to pay off a $100,000 advance at a factor rate of 1.3 (meaning total repayment amount of $130,000), then your APR will be 30%. If your sales go gangbusters and you pay off the advance is 6 months, your rate would be 60%.

Restrictions on Your Business Operations

Your contract with a merchant lender may allow them to put restrictions on how you operate your business. The purpose of the restrictions is to reduce the risk of you not paying back the advance. For example:

  • Prohibited from changing credit card processors
  • Not offering cash discounts to customers
  • Not changing you’re the hours and days you are open for business

By the way, it’s not uncommon for lenders to put restrictions in place to reduce the risk of the customer defaulting.  You need to consider how the restrictions will affect your business.

Not Regulated

Merchant lenders have no federal oversight which means MCA lenders do not have to adhere to banking laws such as the Truth in Lending Act.  It’s a matter of law that banks explain the APR to customers in writing, while MCA lenders are not required to do so.

Is a Merchant Cash Advance Right for Your Business?

The reality for many small business owners is you will face an occasional shortage of much-needed working capital. If you’ve saved for a rainy day, you won’t have to borrow. Even if you’ve saved for a rainy day, you may want to borrow instead of liquidating an asset or draining your savings.

Deciding whether or not a merchant cash advance is right for your business will be easier if you consider your specific needs and limitations. If you answer yes to any one of the following questions, a merchant cash advance might be worth considering.

Do You Receive Payment for Most of Your Sales With Credit/Debit Cards?

Most merchant cash advance lenders require a minimum of $5,000 in monthly credit/debit card sales to qualify for an advance.

Do Your Sales Fluctuate Seasonally?

If your sales are seasonal, the cash it takes to ramp up for the season can make or break your success. And the time between seasons can be tight making a fixed monthly payment difficult.

Do You Need Fast Access to Funds?

One of the biggest advantages of a merchant cash advance is the quick access to a lump sum of cash.

Do You Sell Exclusively Online?

This type of retailer has always been a tough business model for traditional banks to serve. Most banks want to secure a loan with fixed business and personal assets (i.e., equipment, machinery, real estate). As a small virtual retailer, you likely have no fixed business assets to use as collateral.

Do You Have a Low Credit Score?

If your credit score is too low for a bank loan or if you don’t want to add any more debt to your credit report, a merchant cash advance may be a solution for you.

Do You Want to Spend the Funds On Anything You Want?

You need more labor for high season, more inventory, marketing campaigns, or other short-term working capital. The reason you need cash does not factor into the MCA approval process.

If you answer yes to any of the following questions, then a small business loan might be a better solution:

  • Do you want the lowest cost of working capital you can get?
  • Do you need a large amount of capital?
  • Do you have good credit?
  • Do you have a profitable business?
  • Have you been in business for a few years?
  • Do you have collateral to guarantee the loan?
  • Are you comfortable with fixed monthly payments?
  • Do you have the time to go through a longer application and funding process?
  • Are you going to use the funds to purchase a long-term asset?
  • Do you have readily available financial statements and sales projections?

There is a good reason why banks have lower rates for lending money to small businesses. Each item on the above list is information that, when known, makes the bank more comfortable taking a risk on your business. When the bank’s risk is lower, you reap the rewards with a lower repayment rate.

Do You Really Get What You Pay For?

Merchant cash advances are one of the most expensive ways of borrowing short-term cash. For that big-ticket price, you get quick access to cash to spend however you want. What don’t you get through?

You don’t get a reasonable price. You don’t get the opportunity to build a relationship with a bank that will stick with you while your business grows. You don’t earn any credibility with future lenders or investors because you haven’t demonstrated your ability to manage other people’s cash.