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What is a Merchant Cash Advance?

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what is a merchant cash advance

A merchant cash advance or MCA, also known as a business cash advance, is when a borrower sells a percentage of future sales at a slight discount to a lender for an upfront cash advance. You are pledging to repay the advance out of your future sales, and the lender has a right to take repayment from them.

The lender deducts a percentage of your daily sales until the advance and their fees have been repaid. If your business experiences a slow cycle, the repayment amount also decreases. This makes an MCA an excellent choice for businesses that experience cashflow slumps and need funding with repayment options that align with them.

If you struggle to set aside money or budget for a lump sum loan payment then an MCA could be the better choice. Automatic, electronic payments remove the worry that you will forget to mail a check.

MCAs and Credit Card Sales

A merchant cash advance is not a small business loan. You are selling future sales through the contract with your lender. Most lenders require that your business accept credit cards. They will deduct the agreed-upon repayment percentage from each swipe from the day the advance funds until it is repaid.

To approve an application for an MCA, you will have to show proof of past credit card sales. The lender will analyze credit card statements to determine your average monthly sales. They will then give you an advance based upon this average.

To qualify for an MCA with Shield Funding, your business must generate minimum monthly revenues of $8,000.

What is a Factor Rate?

A factor rate, or merchant rate, represents the amount you will pay on the money borrowed. Unlike an interest rate, it is written in decimals rather than percentages. Typical factor rates on small business loans and merchant cash advances range from 1.1 to 1.5.

To calculate an advance’s total cost to you, take the capital borrowed and multiply it by the factor rate. A loan of $20,000 with a factor rate of 1.5 will cost you $30,000. The lender’s profit on the loan is the $10,000 on top of the capital you borrowed.

How is a Factor Rate Different from an Interest Rate?

A factor rate looks similar to an interest rate, and both express the amount you will pay to borrow. But there is one key difference between them. The interest charged to a loan is amortized over the loan’s life and included in your monthly payments. When a lender charges a factor rate, they add the interest to the principal when originating the loan.

The lender makes all their money with a fixed fee. But the factor rate, unlike an interest rate, never changes over the loan’s life.

How do you repay an MCA? 

The most common method to repay an MCA is through split payment processing. The lender partners with your payments processor – or asks you to switch to using their payments processor. The payments processor then holds back in reserve a percentage of each swiped sale. This goes to the lender, and the remainder of the sale goes to you.

While easier for some businesses to repay than a loan with a large monthly payment, the unpredictability of sales and deductions can make budgeting harder. You will not be receiving 100% of your sales into your bank account, which increases uncertainty around revenue streams. Before taking out a merchant cash advance, make sure that you can cover all working capital needs and have some extra for repayment with your current daily revenues.

The lender takes their percentage daily, five days a week, except holidays. The higher the factor rate, the shorter the loan term.

What are the best uses for a Merchant Cash Advance? 

When would taking out a merchant cash advance be the right choice for your business? Primarily when you need a short-term, quick cash infusion.


Did a large customer forget to mail the check, and now you cannot make Friday payroll? Businesses can run into cashflow issues through no fault of their own, as smooth operations often depend on others. It is during those emergencies that a small business owner needs access to capital.

Because an MCA has such as fast and easy approval process, it is ideal for an emergency. Plus, since it is repaid over time, you do not have to worry if the customer’s check takes a while to arrive.

Seasonal Lows

Some industries are more prone to seasonal lows than others. Retail, restaurants, and travel-related businesses tend to do better at some times of year rather than others. But fixed costs, such as rent, do not change during the low times.

If you are a business owner struggling to cover fixed expenses during a seasonal slump, an MCA could be your best seasonal loan option. Since the lender deducts repayments from sales, you will not have to make a large loan payment when sales do not support it. Your revenues and repayments will align.

Unexpected Inventory Needs

Running a business has its unexpected moments, but not all are negative. If a customer placed a larger-than-expected order, you might not have the stock on-hand to fulfill it. Or, a product turned out to be unexpectedly popular, and you have run out.

Taking out an MCA gives you the cash you need to fill unexpected inventory needs in a timely fashion so that you do not lose out on sales.

Equipment Repair

This falls under the banner of emergencies, particularly if your business could not function without a key piece of machinery. AN MCA could fund parts and labor for equipment repair, or allow you to rent a replacement machine while your machine is being fixed.

Short-term funding works well to fill temporary business needs and keep operations running smoothly.

New Business Opportunities

Did a competitor go out of business, and you can buy their inventory at a discount? Or, the space next door opened up, and your landlord has offered it to you at a discount to expand your restaurant. The funds from an MCA could allow you to seize a new business opportunity.

Pros and Cons of Merchant Cash Advances


  • Minimum Revenue Requirements to Qualify
  • Only 2 Months in Business Required to Borrow
  • Low Documentation Needed to Qualify
  • No Minimum Credit Score
  • Fast Funding Turnaround
  • Excellent for Businesses with Uneven Cashflows
  • Easy to Repay through Automatic Deductions
  • No Large, Monthly, Lump Sum Payment


  • More Expensive Than Traditional Loans
  • Your Business Must Typically Process Credit Cards
  • Only Available as Short Term Funding
  • Repayment is Daily
  • Some Caps on Funding Amounts

Is a Merchant Cash Advance Right for Your Business?

After weighing the pros and cons of an MCA against your business needs, only you can make this decision. If the return on investment from how you plan to use the funds outweighs the cost of borrowing, it is probably a good one. But before you accept the advance, make sure you understand the factor rate and repayment terms and are sure you can repay the loan.

If you are ready to borrow, reach out to a funding expert at Shield Funding today.