What is a Merchant Cash Advance (MCA)?
Learn what a merchant cash advance is, how MCAs work, understand the true cost using factor rates, and know when an MCA makes sense versus other options.
A merchant cash advance (MCA) is not technically a loan — it is a purchase of your future sales at a discount. An MCA provider gives you a lump sum of cash in exchange for a percentage of your daily credit card or debit card sales until the advance is repaid.
How MCAs Work
Instead of fixed monthly payments, MCAs collect a percentage of your daily card sales (called the "holdback"). If sales are high, you repay faster. If sales are slow, repayment stretches out — but the total amount owed stays the same.
- Advance amount: The lump sum you receive upfront
- Factor rate: Multiplier that determines total repayment (typically 1.1 to 1.5)
- Holdback percentage: Portion of daily sales withheld (typically 10-20%)
- Remittance: Daily or weekly transfer to the MCA provider
Understanding Factor Rates
MCAs use factor rates instead of interest rates. A factor rate of 1.3 means you repay $1.30 for every $1.00 borrowed. On a $50,000 advance with a 1.3 factor rate, you would repay $65,000 total.
The True Cost
A 1.3 factor rate may sound like 30% interest, but if repaid in 6 months, the effective APR exceeds 70%. Always calculate the APR equivalent to compare costs accurately.
When MCAs Make Sense
MCAs may be appropriate when:
- You need cash very quickly (often funded within 24-48 hours)
- You cannot qualify for traditional financing due to credit issues
- You have high daily card sales volume
- You have a short-term, high-ROI opportunity that justifies the cost
- Other financing options are not available
Risks and Downsides
MCAs come with significant drawbacks:
- High cost: Effective APRs often range from 40% to over 200%
- Daily cash drain: Holdbacks reduce your daily working capital
- Debt cycles: Easy to stack multiple MCAs, creating unsustainable payments
- No early payoff savings: You pay the full factor rate regardless of how fast you repay
- UCC liens: Providers typically file blanket liens on your business
Alternatives to Consider
Before accepting an MCA, explore other options:
- Business lines of credit (lower rates, revolving access)
- Term loans (fixed payments, often lower APR)
- Invoice factoring (if you have B2B receivables)
- SBA loans (if you can wait for longer approval times)
Use our MCA calculator to see the true APR equivalent of any merchant cash advance offer before accepting it.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.