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A merchant cash advance offers funding right when you need it. Even businesses with strong sales volume and steady business revenue can encounter sudden cash flow gaps, whether due to seasonal slowdowns, delayed vendor payments, or rising operating costs. When these gaps appear, access to fast, flexible business funding can be the difference between business as usual and a full-blown crisis.
While traditional bank loans remain the most common form of business financing, they’re not always accessible—particularly for new businesses with limited business credit history, or those with urgent needs that can’t be accommodated by the typical loan approval timeline.
In these cases, alternative financing products like a merchant cash advance—a fast lump sum payment in exchange for a share of a business’s future receivables—can be helpful. Read on to learn how merchant cash advances work, plus where to turn if you’re looking for alternatives.
What is a merchant cash advance?
A merchant cash advance (MCA) is a type of business cash advance in which a financing company provides upfront capital in exchange for a percentage of a company’s future sales. Rather than issuing a loan with interest, MCA companies purchase a portion of your future credit card sales, debit card sales, or other receivables, which are repaid with fees over time.
Unlike a traditional business loan, a merchant cash advance is not based on a fixed repayment schedule. Instead, repayment is tied directly to your overall card sales—debit and credit card transactions—meaning payments fluctuate with your business’s actual cash flow.
This structure makes merchant cash advances accessible to nearly any business with consistent sales activity, including those with less-than-stellar credit or limited borrowing history. It also means the total cost and repayment experience can differ significantly from traditional bank loans.
How does a merchant cash advance work?
In order to obtain a merchant cash advance, a business first completes a financing application with an MCA provider. These are usually alternative lenders that specialize exclusively in merchant financing. MCA providers include Reliant Funding and Rapid Finance.
Instead of focusing heavily on your credit score or reports from the credit bureaus, merchant cash advance providers typically evaluate business bank statements, credit card processing statements, and overall sales volume. Many use a soft credit pull, or establish relatively low borrower credit score minimums (500 and above), making the process accessible to bad-credit borrowers who may not qualify for other business loans.
Once approved, the provider issues the lump sum, often within the same business day or the next. Repayment begins almost immediately and is typically deducted automatically from the business’s bank account or through a percentage of daily or weekly credit card sales.
MCA rates and fees
Instead of charging traditional interest on top of repayment installments, MCA providers charge a flat fee based on a factor rate. This rate determines the total repayment amount upfront. A factor rate is a multiplier (usually between 1.1 and 1.5) applied to the advance amount to determine total repayment. For example, if a business receives $20,000 with a factor rate of 1.25, it will repay $25,000 regardless of how quickly the balance is paid down.
When determining the appropriate factor rate, lenders will look at a variety of risk factors, including:
- Business revenue and sales consistency
- Length of time the business has been operating
- Overall industry risk profile (restaurants, retail, and seasonal businesses may get higher rates)
- The borrower’s credit profile (even though MCAs are accessible with bad credit, a stronger credit score can still lower the factor rate)
- Cash flow predictability
- Average ticket size or transaction volume
In addition to factor rates, merchant cash advance agreements may also include underwriting fees for processing the financing application, administrative fees or servicing charges, and other additional fees depending on the provider.
Since repayment is tied to future credit or future receivables, the structure can feel flexible—payments decrease when cash flow slows and increase when revenue rises. However, it’s important to note that frequent deductions and higher total costs can still strain cash flow.
Advantages and disadvantages of a merchant cash advance
Before choosing to finance your business with an MCA, it’s important to weigh its benefits and tradeoffs carefully.
Advantages
Some of the benefits of utilizing a merchant cash advance include:
- Fast and accessible business funding. Many MCA companies provide approvals within hours, as well as same-day funding, making them useful for urgent business needs or to cover unexpected expenses.
- Flexible repayment tied to revenue. Payments are based on future sales, meaning businesses avoid rigid fixed monthly payments and instead pay in proportion to their cash flow.
- Lenient credit requirements. Unlike traditional loans, MCAs often don’t require a strong business credit score, making them relatively more accessible to new businesses or borrowers with poor credit.
- No collateral. Most MCAs are unsecured, meaning businesses don’t need to pledge assets to obtain the financing. However, some agreements may still include a personal guarantee.
Disadvantages
Some drawbacks of opting for a merchant cash advance include:
- Higher overall costs. Due to factor rates, MCAs can be significantly more expensive than traditional business loan products.
- Frequent repayments. Daily or weekly deductions, rather than predictable monthly payments, can create operational pressure and reduce financial predictability.
- Potential strain on cash flow. Even though payments fluctuate, the constant withdrawals can still strain cash flow, especially during slower sales periods of seasonal downturns, when every dollar counts.
Merchant cash advance alternatives
A merchant cash advance is just one of many business financing options available to small businesses. Comparing alternatives can help ensure you’re choosing the right structure for your immediate and future business needs.
Traditional bank loans
Traditional bank loans offer structured borrowing with fixed interest rates and predictable fixed payments. Bank loans typically require strong financials, a solid credit score, and established borrowing or credit history, but they also usually offer lower costs and longer repayment timelines than merchant cash advances.
SBA loans
SBA loans are term loans and lines of credit backed by the US Small Business Administration, an agency of the federal government. Because the SBA partially guarantees the loan, their bank partners are more willing to extend financing to small businesses that may otherwise not qualify for a traditional bank loan.
SBA loans offer favorable terms, including lower interest rates and extended repayment periods. But they also require a more rigorous application process and longer approval timelines than merchant cash advances.
Business lines of credit
A business line of credit offers flexible borrowing, allowing businesses to draw funds against their approved credit line as needed and repay over a set schedule. If the line of credit is revolving, the business can repeatedly draw against their credit line once they’ve repaid their previous balance.
Shopify Capital offers flexible lines of credit and business loans to eligible businesses using the platform. Eligibility and offer amounts are based on your Shopify store’s sales history, and loans are repaid automatically as a percentage of daily sales.*
Equipment financing
Equipment financing allows businesses to purchase or lease equipment, like machinery, vehicles, or technology, by borrowing against the value of the asset itself. Unlike an MCA, this type of business financing typically involves fixed monthly payments over a set term, and the equipment itself serves as collateral.
Approval typically requires a stronger credit score or established credit history, and funding timelines are usually slower than the near-instant access offered by a merchant cash advance.
Credit cards
Business credit cards provide revolving access to funds for ongoing business needs, similar to a business line of credit but on a smaller scale. While convenient, they often come with high interest rates and rely on both personal and business credit. Still, they can be effective for managing short-term cash flow gaps, emergencies, and smaller expenses.
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Merchant cash advance FAQ
Are merchant cash advances legal?
Yes, MCAs are legal in most jurisdictions. However, they are not classified as traditional loans, which means they may not be subject to some of the same regulations as business or bank loans. Because of this, terms and disclosures can vary widely between providers.
What happens if you default on a merchant cash advance?
Defaulting on an MCA can trigger collection actions, including increased fees, legal action, or enforcement of a personal guarantee if one was signed. Since repayments are tied to future receivables, providers may also seek direct access to your bank account, similar to a tax garnishment.
What is the difference between a loan and a merchant cash advance?
The primary difference is in structure. A traditional loan involves borrowing a fixed amount with interest and repaying it through a set schedule of payments over time (usually monthly). A merchant cash advance, by contrast, is an advance on future sales, repaid through a percentage of daily or weekly debit and credit card transactions rather than fixed, monthly installments.
What is a merchant cash advance used for?
A merchant cash advance is typically used to address short-term working capital needs. Businesses may use funds to purchase inventory, invest in equipment, support marketing efforts, or cover unexpected expenses. Since MCAs provide fast business funding, they often are used when immediate capital is required and other options are not available.
*All loans through Shopify Capital Loans are issued by WebBank. Offers are subject to change based on several factors including your store’s performance and the review of your financial information. Shopify Capital Loans must be paid in full within 18 months, and two minimum payments apply within the first two six-month periods. Offers to apply do not guarantee funding. Repayments are made based on a percentage of daily sales.
