The short answer
A merchant cash advance is not technically a loan: a provider gives you a lump sum in exchange for a share of future sales. The cost is a factor rate, so multiply it by the advance to see the total you repay.
Key takeaways
- A factor rate of 1.2 to 1.5 multiplies the advance to give total repayment.
- Daily or weekly repayment can strain cash flow in a slow week; compare it with your slowest realistic week.
- Prepayment often does not reduce the total owed because the fee is fixed.
- Ask for the total repayment amount in writing before accepting.
| Factor rate | Total repaid | Fee |
|---|---|---|
| 1.2 | $60,000 | $10,000 |
| 1.3 | $65,000 | $15,000 |
| 1.5 | $75,000 | $25,000 |
What a merchant cash advance is
A merchant cash advance, or MCA, is not technically a loan. A provider gives you a lump sum in exchange for a share of your future sales, and you repay it, plus a fee, through a fixed percentage of daily or weekly receipts, or through fixed daily or weekly withdrawals.
Because it is structured as a purchase of future receivables rather than a loan, it is regulated differently, and the cost is described differently, which makes it harder to compare.
How the cost works: the factor rate
MCAs use a factor rate instead of an interest rate. A factor rate is usually a number such as 1.2 to 1.5. Multiply it by the advance to get the total you repay.
For example, an advance of $50,000 at a factor of 1.3 means you repay $65,000, a fee of $15,000. If that is repaid over six months, the annualized cost is far higher than the same fee spread over several years, which is why a factor rate can look cheaper than it is. Always translate the factor rate into total repayment and the repayment period.
How repayment works
Repayment is typically taken daily or weekly, either as a fixed amount or as a percentage of card sales. A fixed daily withdrawal is predictable but can strain cash flow in slow weeks. A percentage of sales flexes with revenue but usually has a higher overall cost.
Before accepting, work out the daily or weekly amount and compare it with your slowest realistic week, not your average.
When an MCA can make sense
- You need cash very quickly for an opportunity with a clear, short-term return.
- Your credit profile does not qualify you for a lower-cost product right now.
- Your sales are strong and consistent, so the repayment is manageable.
- You have a plan to move to cheaper financing afterwards.
It is generally a short-term tool, not a long-term solution.
Warning signs and risks
- Stacking: taking a second advance to pay the first can create a repeating cycle that is hard to exit.
- Daily withdrawals can overdraw your account in a slow week.
- Confession-of-judgment clauses and personal guarantees can create serious personal exposure. Read them closely and, if possible, have a lawyer review the contract.
- Prepayment often does not reduce the total owed, because the fee is fixed.
- Brokers and providers may emphasize speed over total cost.
If an offer feels rushed, slow down. A legitimate provider will give you the full repayment amount in writing.
Questions to ask any provider
- What is the total amount I will repay?
- How and when is repayment taken, and what is the amount?
- Is there a fee for early repayment, and does paying early lower the total?
- Are there origination, processing or other fees taken from the advance?
- What happens if my sales drop or I miss a payment?
- Is a personal guarantee required, and does the contract include a confession of judgment?
Alternatives worth comparing
Depending on your situation, a short-term working capital loan, a business line of credit, equipment financing or invoice financing may cost less and offer more predictable payments. Compare the total cost across options, not just the speed.
lendfloCapital helps business owners compare financing options through one short application, with no cost to apply and a soft credit pull for the initial review.
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Frequently asked questions
What is a factor rate?
A multiplier, usually between 1.2 and 1.5, applied to the advance to give the total you repay. An advance of $50,000 at a factor of 1.3 means you repay $65,000, a fee of $15,000.
Is a merchant cash advance a loan?
Not technically. It is structured as a purchase of future receivables, so it is regulated differently and the cost is described differently, which makes it harder to compare with a loan.
What should I ask a merchant cash advance provider?
The total amount to repay, how and when it is taken, whether early repayment lowers the total, any fees taken from the advance, what happens if sales drop, and whether a personal guarantee or confession of judgment is included.
