Loan type
Merchant cash advances: what they cost, and what to do if you are already in one
An MCA is a purchase of future receivables, priced with a factor rate, repaid by daily debits. It is the most expensive money in small business, and sometimes the only money.
At a glance
| What it is | A purchase of future receivables, not a loan |
|---|---|
| Typical amount | $5,000 to $500,000; large funders will go to $5 million on high card volume |
| Pricing | 1.15 - 1.55 factor rate |
| True annualized cost | Commonly 40% to 350%+, occasionally far higher |
| Repayment | Daily or weekly ACH debits, or a percentage of card settlements |
| Term | Typically 3 to 18 months |
| Credit | Often approved down to 500; sometimes no minimum |
| Time to funding | Same day to 3 days |
| Early repayment | Usually saves nothing — the full payback is owed regardless |
A good fit when
A genuine short-term revenue opportunity where the return clearly exceeds the cost, and no other option can move in time.
A poor fit when
Covering an ongoing shortfall. An MCA against a structural cash-flow problem accelerates the problem — it does not solve it.
How the pricing works, and why it confuses people
An MCA is not quoted with an interest rate. It is quoted with a factor rate: a multiplier applied to the amount advanced. Take $50,000 at a 1.35 factor and you owe $67,500 — full stop, whenever you repay it.
The number that is missing from that quote is time, and time is the whole story. $17,500 of cost over five years would be cheap. Over six months it is not.
| Advance | Factor | Total payback | Cost | If repaid over... | Roughly equivalent APR |
|---|---|---|---|---|---|
| $50,000 | 1.20 | $60,000 | $10,000 | 12 months | ~37% |
| $50,000 | 1.35 | $67,500 | $17,500 | 9 months | ~90% |
| $50,000 | 1.35 | $67,500 | $17,500 | 6 months | ~135% |
| $50,000 | 1.49 | $74,500 | $24,500 | 4 months | ~290% |
The contract terms that cause real damage
- Confession of judgment
- A clause where you pre-agree to a judgment against you if the funder declares default, sometimes without notice or a hearing. New York restricted their use against out-of-state borrowers in 2019 and several states have acted since, but the clause still appears. If you see one, treat it as a reason to walk.
- Personal guarantee of performance
- Marketed as "not a personal guarantee of the debt." In practice it converts to personal liability if you are found to have breached, including by changing bank accounts or processors. Read what triggers it.
- Reconciliation rights
- A genuine MCA is supposed to adjust with your revenue. Many contracts make reconciliation available only on written request within a narrow window, with documentation. Know the process before you need it, because if the debits do not adjust when revenue falls, this is functionally a fixed loan with an enormous rate.
- Stacking prohibitions
- Most contracts forbid taking a second advance. Brokers will call you within days offering one anyway. Stacking is how a manageable situation becomes an unmanageable one, and it is a breach that can trigger everything else in this list.
If you are already in one
This is the situation most people arrive here for. In rough order of what usually helps:
Stop taking calls from brokers offering a second advance
Stacking is the single most common path from one difficult advance to four impossible ones. Nothing else on this list works if you keep stacking.
Read the reconciliation clause and use it
If your revenue has genuinely dropped, most contracts require the funder to adjust the debit. Send the request in writing, with the bank statements, and keep a copy. Verbal requests are not requests.
Model whether a consolidation actually helps
MCA consolidation and refinance offers are real, and many of them are just a fifth advance with a nicer name. The only test that matters: total dollars out per month, and total dollars owed at the end. If both do not fall, it is not a solution.
Look at whether you now qualify for something conventional
Businesses often take an MCA during a bad quarter and are still paying it during a good year. If you have two years of returns and your credit has recovered, a term loan or an SBA 7(a) at a fraction of the cost may be available now even though it was not then.
Get real advice if the debits are threatening payroll
A commercial finance attorney who has handled MCA disputes is worth the consultation fee. Do not take restructuring advice from the funder's own collections department.
The alternatives, ranked by how much cheaper they are
- Invoice factoring — if you invoice other businesses. Similar speed, typically a third to a tenth of the cost, and underwritten on your customers rather than on you.
- Equipment financing — if the need is an asset. Credit-flexible because the machine secures it.
- A CDFI or SBA microloan — slower, but genuinely available to businesses with weak credit, at single-digit to low-teens rates.
- A business line of credit — if your revenue supports it, even an expensive line usually beats an MCA.
- Negotiating terms with your own suppliers — free, underused, and often more effective than any of the above.
Questions people actually ask
Is a merchant cash advance a loan?
Legally, funders structure it as a purchase of future receivables specifically so it is not a loan, which historically kept it outside state usury caps and lending licence requirements. Courts have gone both ways on whether particular agreements are really disguised loans, and several states have introduced commercial financing disclosure laws requiring APR-style disclosure. The law here is genuinely in motion.
Can I get out of a merchant cash advance early?
You can repay early, but on most agreements you owe the full agreed payback regardless, so you save nothing. Some funders offer a discount for early payoff. It is entirely discretionary unless it is written into your contract — so ask for it in writing before you sign.
What happens if I cannot make the daily payments?
Contact the funder in writing and invoke the reconciliation clause if your revenue has dropped. Do not simply close the bank account or switch processors — that is typically an explicit event of default and can trigger personal liability under the guarantee of performance.
If the situation is serious, speak to a commercial finance attorney before you speak to collections.
Do merchant cash advances affect my credit score?
Usually the application involves only a soft pull, and payment history is typically not reported to consumer bureaus. But the UCC-1 filing is public and visible to other lenders, and a default that goes to judgment absolutely shows up. The absence of positive reporting also means an MCA repaid perfectly builds you no credit at all.