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What is a merchant cash advance and what does it cost?
A merchant cash advance gives you a lump sum that you repay through a share of daily card sales plus a fixed fee, expressed as a factor rate. At a 1.3 factor rate, a $50,000 advance costs $65,000 to repay. It is fast but often more expensive than a term loan.
Merchant cash advances (MCAs) offer fast access to capital with flexible repayment tied to your daily sales. They can also be one of the most expensive ways to borrow. Here is an honest breakdown of how they work, when they make sense and when a different product is the better choice.
How a merchant cash advance works
A provider gives you a lump sum. You repay it through a share of your daily card sales, plus a fixed fee expressed as a factor rate, until the total is paid. When sales are strong you repay faster; when they are slow the payments shrink.
Why the real cost is easy to miss
The fee is fixed up front, so repaying quickly does not reduce it. The faster an advance is repaid, the higher its effective annual cost. A $15,000 fee over six months is far more expensive on an annualized basis than the same fee over twelve. Compare the total dollar amount repaid, not just the headline factor rate, and be wary of anyone who talks only about the factor rate.
When an advance can make sense
- Your sales are mostly by card and fluctuate with the season
- You need money within days and cannot yet qualify for a term loan
- You want repayment to rise and fall with sales
When to think twice
- You have time to qualify for a cheaper product
- Your margins are thin enough that a daily deduction would squeeze operations
- You already have another advance or loan being repaid daily
- The offer is hard to understand or the total repayment is not stated clearly
Alternatives to compare
Working capital loans of $5K to $250K and term loans from $25K to $2M often cost less for the same amount. A broker can put several offers side by side so you see the full repayment for each. Read our guide to working capital loans and the broader look at alternative financing options.
Questions to ask before you sign
- What is the total amount I will repay, in dollars?
- What percentage of daily sales will be taken, and can it change?
- Is there any benefit to paying it off early?
- What happens if my sales fall sharply?
- Are there other fees, such as origination or administration?
