Quick comparison

  • Funding source: MCA providers (often alternative lenders) vs banks, credit unions, or online lenders for term loans.
  • Repayment: Revenue‑based (percentage of daily/weekly sales) for MCAs; fixed monthly payments for term loans.
  • Cost: MCAs use factor rates and can translate to very high APRs; term loans publish interest rates and APRs and are generally cheaper for comparable terms.
  • Eligibility: MCAs rely on sales volume more than credit; term loans require credit, documentation, and sometimes collateral.

How each product actually works

Merchant cash advance (MCA)

An MCA is not technically a loan in many contracts; it’s a purchase of a portion of future receivables. The provider gives a lump sum today and takes an agreed percentage of daily credit‑card or daily sales until the advance plus the premium (expressed as a factor rate) is fully repaid. Typical payback windows are short — often 3–12 months — and repayment accelerates with higher sales and slows with lower sales when remittance is percentage‑based.

Key terms you’ll see in MCA offers:

  • Factor rate: a multiplier (for example, 1.2–1.6) applied to the advance to determine the total repayment — not the same as interest rate. A $50,000 advance with a 1.3 factor rate equals $65,000 total to repay.
  • Holdback or split: the daily percentage taken from card sales (for example, 8–20%).
  • Fixed ACH or daily sweep: some MCA agreements use fixed daily debits rather than a true percentage, which can increase strain during slow periods.

Merchant cash advances are marketed for speed and minimal paperwork, making them attractive for seasonal retailers, restaurants, or any firm with strong card sales that needs immediate capital.

Small‑business term loan

A term loan is a traditional loan: lender disburses a fixed amount up front and the borrower repays principal and interest over a set term (short term to several years). Rates may be fixed or variable. Banks and SBA‑backed programs (like SBA 7(a)) often require financial statements, tax returns, and a stronger credit profile, but they offer lower cost of capital and longer terms for investments such as equipment or expansion (see SBA guidance on small business loans) [SBA].

Term loans can be unsecured or secured by business assets. Lenders evaluate debt service coverage, cash flow projections, business and personal credit scores, and time in business.

Cost comparison: factor rates vs APR

Understanding the total cost is essential:

  • MCA factor rates are applied to the principal to get total repayment; because payback periods are short, the implied APR can exceed 70% or much higher depending on term length. For transparency, convert factor rate to effective APR when comparing offers.

  • Term loans list an interest rate and APR and amortize repayment over the loan term. A 3–7 year term loan with a 7–12% APR will typically be far less expensive than an MCA for the same cash need.

Example (illustrative):

  • MCA: $50,000 advance, factor rate 1.30 → $65,000 repaid over 6 months. Effective APR can be roughly 60–80% depending on repayment schedule.
  • Term loan: $50,000 at 9% APR for 3 years → monthly payment ≈ $1,592, total repaid ≈ $57,312. The term loan is materially cheaper and predictable.

Always ask providers to show the effective APR or annualized cost and run both offers through a side‑by‑side comparison.

Eligibility and underwriting differences

MCA approval focuses on recent daily/weekly card receipts and bank‑deposit history. Lenders may approve businesses with shorter histories and weaker credit if card volume is strong. Term loans require more documentation: tax returns, profit & loss statements, bank statements, and often a minimum time in business and a reasonable personal/business FICO score.

SBA products have additional requirements and may require a personal guarantee and collateral for larger loans, but they generally come with lower rates and longer terms — see SBA for current program details [SBA].

When each option makes sense

Consider an MCA when:

  • You need money in days for an urgent expense (payroll, repairs, short seasonal gap).
  • You have high, steady card volume and prefer payments that scale with sales.
  • You cannot qualify for bank financing and can accept higher costs for speed.

Consider a term loan when:

  • You’re funding growth or a capital purchase where predictable, lower‑cost financing improves ROI.
  • You can wait weeks for approval and meet documentation and credit requirements.
  • You want a known amortization schedule to budget long‑term.

Practical steps to compare offers

  1. Ask every lender for a clear amortization or payback schedule and a written cost summary. For MCAs, request a sample daily payment schedule based on your average monthly sales.
  2. Convert MCA factor rates into effective APRs. Use an online calculator or ask for an annualized breakdown. Several MCA analysis guides on FinHelp explain factor rates in detail [Merchant Cash Advance vs Short-Term Loans: Factor Rates Demystified].
  3. Check fees: prepayment penalties, origination fees, daily ACH fees, NSF fees, and any personal‑guarantee requirements.
  4. Run cash‑flow stress tests: model 20–40% lower sales and see each offer’s impact on liquidity.
  5. Read the contract: note collections rights, default triggers (missed payments vs insufficient sales), and whether the lender can debit your bank account directly.

Relevant FinHelp resources:

Common red flags with MCAs and alternative lenders

  • No APR disclosure: if a provider won’t show an annualized cost, treat the offer with suspicion.
  • Daily fixed ACH sweeps that don’t scale with sales can cripple cash flow during slow weeks.
  • Ambiguous default provisions that accelerate repayment or allow seizure of deposits without notice.
  • Pressure to accept fast funding without time to review terms or consult counsel.

If you spot these, pause and get a second opinion — ideally from a trusted CPA, attorney, or business‑finance advisor.

Regulatory and consumer‑protection notes (2025)

MCAs operate largely in the alternative‑finance space and have less uniform federal regulation than traditional loans. The Consumer Financial Protection Bureau (CFPB) has examined merchant cash advances and revenue‑based financing and published consumer alerts in prior years; state laws vary and some states have enacted rules that affect collection practices and disclosures. For term loans, federal and state consumer‑credit laws and the SBA’s program rules apply for SBA‑backed loans [CFPB] [SBA]. Always check current guidance from the CFPB and your state regulator before signing.

Sources and further reading

  • U.S. Small Business Administration: small business lending programs and eligibility (sba.gov) [SBA].
  • Consumer Financial Protection Bureau: reports and guidance on alternative small‑business financing (consumerfinance.gov) [CFPB].
  • FinHelp: Merchant Cash Advance glossary and comparisons (finhelp.io) [FinHelp].

Professional tips from practice

In my 15 years advising small businesses, I’ve seen owners use MCAs successfully to get past a short seasonal strain, but those same businesses often refinance an MCA with a term loan as soon as they qualify to reduce ongoing cost. If you’re considering an MCA, treat it as bridge financing and plan a refinancing path. When choosing a term loan, lengthen the term only if the business cash flow supports it; avoid taking longer terms that increase interest cost without matching the asset life.

Checklist before you sign

  • Request full written terms, including daily payment mechanics and total repayment.
  • Calculate scenario repayments at 20–40% reduced sales.
  • Compare to a 3‑year and 5‑year term‑loan quote (include all fees).
  • Confirm whether a personal guarantee or collateral is required.
  • Consult your accountant or attorney for any ambiguous language.

Disclaimer

This article is educational and does not constitute legal or financial advice. Your business’s best option depends on its specific cash flow, credit profile, and goals; consult a licensed financial advisor, CPA, or attorney for personalized guidance.