Building Your Business What Is a Merchant Cash Advance? Merchant Cash Advance Explained in Less Than Four Minutes By Ella Ames Updated on January 26, 2022 Reviewed by Margaret James Reviewed by Margaret James Twitter Peggy James is an expert in accounting, corporate finance, and personal finance. She is a certified public accountant who owns her own accounting firm, where she serves small businesses, nonprofits, solopreneurs, freelancers, and individuals. learn about our financial review board Fact checked by Robyn Conti In This Article View All In This Article Definition and Examples of a Merchant Cash Advance How a Merchant Cash Advance Works Advantages of a Merchant Cash Advance Disadvantages of a Merchant Cash Advance Photo: Geber86 / Getty Images Definition A merchant cash advance (MCA) is a short-term financing option in which a business receives a lump sum of funding and pays the money back incrementally. A merchant cash advance (MCA) is a short-term financing option in which a business receives a lump sum of funding and pays the money back incrementally. A percentage of the company’s daily or weekly credit or debit card sales is normally deducted as repayment for the funding. In this article, we’ll discuss the details of what a merchant cash advance is, how it works, and why it’s important for business owners to know the basics of this funding option. Definition and Examples of a Merchant Cash Advance A merchant cash advance is a type of short-term funding in which a business gets a set amount of cash upfront from a financing provider, and then typically repays the money with a percentage of daily or weekly credit or debit card sales. Rather than making a set amount of monthly payments, a small percentage of your debit or credit card sales is automatically withheld to repay the merchant cash advance. This continues until the debt has been paid off. For example, if you were to take out a merchant cash advance for a renovation to your small business, the company would give you a lump sum that you could use right away. The lender would then take a percentage of your daily card sales until your balance, plus interest and fees are paid in full. Note Merchant cash advances commonly have higher rates and fees than other lending products, and can often attract predatory lenders. They’re usually recommended as a last resort when it comes to funding options. Acronym: MCA How a Merchant Cash Advance Works A merchant cash advance is provided by certain small business finance providers. It is considered an alternative to a traditional small business loan. While MCAs have some perks that can make them attractive to businesses, they can also have a lot of drawbacks that small business owners need to be aware of. Advantages of a Merchant Cash Advance Applying for a merchant cash advance requires substantially less paperwork and documentation than applying for a loan or line of credit, and there is no fee to apply. Upon applying, a business typically must submit bank statements showing months’ worth of revenue in order to qualify for funding. Note Merchant cash advances have a waiting period of as little as three to five days, and an easy approval process—even for businesses with poor credit history. Because merchant cash advances are classified as commercial transactions and not loans, merchant cash advances are typically unsecured, and amounts provided can range from a few thousand dollars up to the hundreds of thousands. There are also no fixed terms: Providers estimate the repayment rate based on the business’s sales history. Disadvantages of a Merchant Cash Advance As mentioned, MCAs are not technically considered loans. As a result, they are not subject to the same laws or federal regulations as traditional small business loans, which leaves more room for manipulation. MCAs are regulated by the Uniform Commercial Code as established by each state in the U.S., rather than federal banking laws such as The Truth in Lending Act. Note Paying back a merchant cash advance can hinder your business’s cash flow, and it can be easy to get caught in a cycle of debt. Know all of your options before deciding on a financing option. In addition, these types of transactions often cost more than a traditional SBA loan and are offered in smaller dollar amounts for short-term purposes. When calculated as an APR, merchant cash advances can range between 35% and 70%. Before applying for and receiving a merchant cash advance, consider other ways to finance your business, such as taking out a small business loan or other sources of small business funding. No matter what, you’ll want to make sure it’s the right choice for your financial situation before moving forward. Key Takeaways A merchant cash advance is a type of short-term funding where a business gets a set amount of cash upfront from a financing provider, and then typically repays the money with a percentage of daily or weekly credit or debit card sales.Merchant cash advances are unsecured and have no fixed terms, meaning that providers estimate the repayment rate based on the business’s sales history.MCAs are not technically considered loans, which means they are not subject to the same laws or federal regulations as traditional small business loans, leaving more room for manipulation. While merchant cash advances can seem like an attractive option with their fast and easy approval process, they’re often recommended as a last resort of funding as they usually have high rates and fees and can draw predatory lenders. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. American Express. "3 Financing Options for When Your Business Needs Funding." Accessed Nov. 11, 2021. First Data. "Merchant Cash Advance." Accessed Nov. 11, 2021. First Data. "A First Data White PaperMerchant Cash Advances Provide Key Financing Merchants Can Tap Processors When Traditional Funding Dries Up," Page 5. Accessed Nov. 11, 2021. Harvard Business School. "The State of Small Business Lending: Innovation and Technology and the Implications for Regulation." Page 58. Accessed Nov. 11, 2021.