The Basic Definition
A merchant cash advance (MCA) is not a loan. It is a purchase of a portion of your business's future receivables at a discount. A funder provides a lump sum of capital today, and in exchange, you agree to repay that amount — plus a fee — by remitting a fixed percentage of your daily deposits until the balance is satisfied.
Because an MCA is structured as a commercial transaction rather than a loan, it operates outside traditional lending regulations. There is no fixed monthly payment, no set payoff date, and no interest rate in the traditional sense. Repayment accelerates when your sales are strong and naturally slows when business is slow.
Key distinction: You are not borrowing money and paying it back with interest. You are selling a portion of future revenue at a discount in exchange for capital today. This distinction matters both legally and practically.
How the Factor Rate Works
Instead of an interest rate, MCAs are priced with a factor rate — a simple multiplier applied to the advance amount to determine your total payback.
Total Payback = Advance Amount × Factor Rate
If you receive a $100,000 advance at a factor rate of 1.30, you will repay a total of $130,000. The $30,000 difference is the cost of capital, collected through daily deductions until the balance reaches zero.
| Advance Amount | Factor Rate | Total Payback | Cost of Capital |
|---|---|---|---|
| $25,000 | 1.20 | $30,000 | $5,000 |
| $50,000 | 1.25 | $62,500 | $12,500 |
| $100,000 | 1.30 | $130,000 | $30,000 |
| $200,000 | 1.35 | $270,000 | $70,000 |
MCA vs. Traditional Business Loan
| Feature | Merchant Cash Advance | Bank Loan |
|---|---|---|
| Time to fund | 24 – 72 hours | Weeks to months |
| Collateral required | Typically none | Often required |
| Credit score needed | Flexible — 500+ | Usually 680+ |
| Fixed monthly payment | No — adjusts with revenue | Yes |
| Cost of capital | Higher | Lower |
| Documentation | Bank statements only | Tax returns, financials, P&L |
What Factor Rates Really Cost in APR Terms
Because factor rates don't look like interest rates, they can obscure the true cost. A 1.25 factor rate on a 6-month advance translates to roughly 50% effective APR. A 1.30 factor on a 4-month advance can exceed 90% APR.
These numbers are high compared to bank loans — but MCAs fund in hours without collateral, and the capital may generate a return that far exceeds the cost. Our cost calculator shows the effective APR on your exact scenario before you commit to anything.
Who Qualifies?
- Time in business: 6 months minimum, 12 months preferred for larger advances.
- Monthly revenue: Most funders require $10,000–$15,000+/month in gross deposits.
- Bank statements: 3–6 months — the primary underwriting document. No tax returns needed.
- Credit score: Some funders go as low as 500. Cash flow consistency matters far more.
- Industry: Most industries qualify. Restricted categories include cannabis and adult entertainment.
Common Questions
Most MCA funders perform a soft pull for initial qualification — no impact on your score. A hard pull only happens after you've agreed to move forward with a specific offer.
Yes. MCAs are primarily underwritten on cash flow, not credit score. Businesses with scores as low as 500 regularly qualify. Your revenue consistency and bank statement history carry far more weight than your personal credit profile.
Unlike a loan, paying off an MCA early typically does not reduce the total amount owed — the full payback was agreed to at origination. Some funders do offer early payoff discounts. Always ask before signing.
With split withholding, repayment automatically slows with your revenue. With fixed ACH debit, a significant revenue drop can create pressure — contact your funder proactively. Most would rather modify a schedule than push a business into default.