What Are Revenue-Based Financing and Merchant Cash Advances for Startups?

Startups that already generate revenue but cannot—or do not want to—take on traditional bank debt or equity dilution often look to revenue‑based financing (RBF) and merchant cash advances (MCAs). Both are nonbank, alternative options that base repayment on future sales instead of fixed monthly payments. In my 15+ years advising early‑stage companies, I’ve seen these products provide speed and flexibility when timing matters, but they also come with higher effective costs and important structural differences that founders must understand before signing.

How each product works, simply

  • Revenue‑Based Financing (RBF): An investor gives a company capital in exchange for a fixed percentage of gross revenue (commonly 2–10%) until the company has repaid a multiple of the original amount—often 1.2x to 3x the advance. Repayments scale with sales: when revenue rises, payments increase; when revenue falls, payments decline.

  • Merchant Cash Advance (MCA): A provider advances cash based primarily on the business’s historic daily card sales. Repayment comes as a fixed share of daily credit‑card receipts or through an Automated Clearing House (ACH) debit, often at higher factor rates than RBF. MCAs are typically used by retail, restaurants, and other card‑centric businesses.

(For more detail on the structures and costs, see FinHelp’s deeper guides on Revenue‑Based Financing and Merchant Cash Advances Explained: Costs, Uses, and Risks.)

Typical terms and pricing

  • Advance size: RBF deals frequently range from $50,000 to several million, depending on revenue scale. MCAs often run smaller—$10,000 to $500,000—though larger deals exist.

  • Repayment rate: RBF common revenue shares are 2–10% per month. MCA remittance rates commonly equate to 10–20% of daily card sales.

  • Repayment cap / factor rate: Rather than an APR, both products typically use a multiple or factor rate. For RBF the total payout might be 1.2x–3x the advance; for MCAs, factor rates of 1.2–1.5 (or higher, relatively short term) are common. When translated to APR, short‑term MCAs can exceed triple‑digit APR equivalents—which is why comparing effective cost matters (see our guide on how factor rates translate to APR: https://finhelp.io/glossary/short-term-merchant-cash-advances-how-factor-rates-translate-to-apr/).

  • Time to fund: Both can fund in days to weeks versus weeks or months for traditional loans.

Detailed example (illustrative)

RBF example: A SaaS startup takes a $200,000 RBF deal with a 1.5x repayment cap and agrees to remit 6% of monthly revenue. The total repayment owed is $300,000. If monthly revenue is $100,000, payment is $6,000 that month; if revenue drops to $50,000, payment is $3,000.

MCA example: A restaurant takes a $100,000 MCA with a factor rate of 1.35. Total owed is $135,000. If the agreed remittance is 15% of daily card sales and the restaurant averages $5,000 per day, the daily payment is $750. If sales shrink, the intake — and thus daily deduction — shrinks too, but the high effective cost can still strain margins.

Note: These examples are illustrative. Actual terms vary widely by provider and borrower revenue profile.

Who is a good fit?

  • Revenue‑Based Financing: Best for companies with recurring revenue or predictable, growing sales (SaaS, e‑commerce, subscription businesses, some B2B services). RBF suits founders who want non‑dilutive capital but prefer payments that scale with business performance. A history of several months to a couple years of revenue is typically required.

  • Merchant Cash Advance: Best for card‑heavy businesses (restaurants, retail, salons) that need fast working capital for inventory, payroll, or seasonal buildouts. MCAs often target businesses with steady daily card volume even if credit scores or collateral are weak.

Pros and cons

Pros:

  • Speed: funding in days.
  • Flexibility: payments rise and fall with revenue.
  • Non‑dilutive: founders don’t give up equity.
  • Lower formal underwriting: less emphasis on collateral or personal guarantees (though many providers still require them).

Cons:

  • Higher effective cost: factor rates and short repayment horizons can translate to much higher APRs than bank loans. The Consumer Financial Protection Bureau and other consumer advocates warn small businesses to carefully evaluate cost and contract terms. (See CFPB small business resources: https://www.consumerfinance.gov/.)
  • Complex pricing: without converting factor rates to APR or effective cost, businesses can underestimate expense.
  • Cash‑flow pressure: MCAs in particular withdraw daily, which can squeeze working capital during slow periods.
  • Contract terms: some MCA contracts contain automatic ACH access, personal guarantee clauses, and cross‑default provisions.

Negotiation and due diligence checklist (practical tips)

  1. Ask for the total repayment amount and convert the offer to an effective annualized cost (APR) for comparison. If the provider resists, treat that as a red flag.
  2. Get the remittance rate, repayment cap, and whether payments are gross or net of refunds/chargebacks in writing.
  3. Confirm whether the agreement includes a personal guarantee or grants the lender access to your merchant account or bank account.
  4. Request a clear explanation of how seasonal dips affect payment timing and whether the term is open‑ended until the cap is met.
  5. Compare offers to alternatives: business line of credit, SBA microloans, invoice financing, or equity. See FinHelp’s comparison pages such as Comparing Merchant Cash Advances and Revenue‑Based Financing.
  6. Run a stress test on cash flow—model 20–40% revenue drops and ensure you can cover payroll and operating expenses while servicing the advance.

Common red flags

  • Vague language about total cost or no clear repayment cap.
  • Unusual default provisions that accelerate repayment on minor covenant breaches.
  • Very short implied repayment windows with very high factor rates that suggest predatory pricing.
  • High-pressure tactics to sign quickly.

How regulators and advisors view these options

Regulators and consumer advocates stress transparency. The Consumer Financial Protection Bureau (CFPB) has investigated merchant‑facing financing practices and encourages small businesses to understand effective cost and contractual obligations (CFPB resources: https://www.consumerfinance.gov/). The U.S. Small Business Administration (SBA) recommends exploring SBA‑backed loans and local small‑business assistance programs as often cheaper alternatives (SBA: https://www.sba.gov/).

Alternatives and refinances

If you need capital but find RBF or MCA pricing too high, consider:

  • Business line of credit for short‑term working capital.
  • SBA microloans or 7(a) loans for longer terms and lower rates.
  • Invoice financing / factoring for B2B receivables.
  • Equity or convertible notes if you can accept dilution for lower cash costs.

Refinancing: Some lenders will refinance an MCA or RBF with a term loan once revenue stabilizes, reducing monthly costs. Refinances often require improved financials and time in business.

Tax and accounting considerations

Tax treatment can vary. Generally, the business should record proceeds and repayments consistent with accounting standards and consult a CPA for tax consequences. Some providers characterize transactions as sales of future receivables; others treat them as loans. The IRS guidance for small businesses is a starting point, but your CPA will advise on the correct treatment (IRS: https://www.irs.gov/businesses/small-businesses-self-employed).

Final advice from practice

In my practice, RBF can be a strategic tool for scaling predictable‑revenue businesses when owners want to avoid dilution and accept higher financing cost for flexibility. MCAs are troubleshooting tools—excellent for fast, short‑term needs when alternatives aren’t available, but rarely good long‑term financing due to high effective costs. Always model best‑ and worst‑case scenarios, insist on written terms that disclose total repayment, and compare offers across multiple providers.

Professional disclaimer: This article is educational and does not constitute legal, tax, or investment advice. Consult a licensed attorney, CPA, or financial advisor before signing financing agreements.

Authoritative sources and further reading