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Discover Whether a Merchant Cash Advance Is Right for Your Business

Merchant cash advances are an alternative to traditional bank financing. A merchant cash advance, or MCA, is an agreement that provides cash to a business in exchange for a claim against a portion of that business’ future income.

What is a Merchant Cash Advance?

A merchant cash advance is a system that allows a business owner to accept an advance on credit card payments or other receivables streams. A merchant cash advance, or MCA, isn't a loan, but an advance based on future revenues or credit card sales of a small business.

Merchant Cash Advance Example

To understand an MCA, it helps to consider a hypothetical situation in which an entrepreneur owns two businesses. Fancy Foods and WizBang Widgets each have an immediate need for $20,000.


  • Fancy is a food truck, and the owner needs $10,000 to repair the vehicle and move it away from the low traffic area it currently occupies. The owner wants to use the remainder of the funds to pay a signing bonus to a new cook who promises to raise margins to 10% of revenue. Currently, the company is only breaking even. Over the next six months, the owner expects to generate $130,000 in revenue and, assuming the new cook achieves the promised improvements, $13,000 in profit.


  • WizBang is an Amazon.ca Marketplace business, and it needs $20,000 to order production of a recently developed widget. There's a narrow window before competitors offer the product, so speed is essential. Over the next three months, the owner expects to generate $130,000 in revenue and $65,000 in net cash flow.

Key Parties & Terms

Key parties include the borrower, the provider and the processor. Although an MCA isn't a loan, it's easiest to think of the business receiving the advance as the borrower. The provider makes the advance and claims a percentage of the borrower’s future income.

The processor, whose relationship with the borrower predates the MCA, becomes responsible for collecting funds from customers and allocating those funds between the borrower and the provider.

  • The advance represents the funds the borrower receives under the MCA. The advance for both Fancy and WizBang is $20,000.
  • The factor determines the amount the borrower repays in exchange for the advance. Unlike a loan, there is no expressed interest rate in an MCA. The factor varies among different providers and is a key point in choosing a provider. For this example, assume a 25% factor. That means both Fancy and WizBang pay $25,000 for a $20,000 advance.
  • The holdback is the percentage of the borrower’s daily receipts the processor directs to the provider to repay the advance. Holdbacks also vary among providers based on their targeted repayment terms. In this example, assume a 20% holdback. Based on the projected revenue noted above, that leads to a six-month payback for Fancy and three months for WizBang.

MCAs Provide Timely Access to Financing

Getting a traditional bank loan can take weeks, and small business approval rates are low. The MCA approval process offers high approval rates, and it takes a few days or sometimes even just a few hours. That suits the time-sensitive needs of the business owners of Fancy and WizBang.

Accessibility Comes With a Cost

By traditional terms, MCA financing is expensive. In the example, Fancy expects to pay $5,000 to use $20,000 for six months, a 50% annualized borrowing cost. That rate seems cheap against the 100% implied for WizBang’s use of the same amount for three months.

An entrepreneur might balk at paying such rates and abandon both projects if less expensive sources are not available. In doing so, however, the business owner walks away from the lucrative WizBang project.

These examples illustrate that the appropriateness of an MCA is determined by the returns generated from the funds rather than how the funds are used. Each case is different, but high-return, time-sensitive projects make stronger MCA business cases than funding operating costs.

WizBang shows an instance well-suited for MCA financing while the Fancy case is problematic because of operating issues, poor financial performance and the use of expensive financing to buy more time.

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