Merchant Cash Advances vs. Business Lines of Credit

Quick comparison

Merchant cash advances and business lines of credit both help businesses bridge cash shortfalls, but they operate very differently. In my work advising more than 500 small-business clients, I’ve seen MCAs deliver funds quickly at a high effective cost, while LOCs take longer to set up but usually offer much lower interest and greater flexibility. Use this guide to compare true costs, cash-flow impact, eligibility, and practical scenarios where one option typically beats the other.

How each product actually works

• Merchant cash advance (MCA): The provider gives a lump sum in exchange for a percentage of future receivables (commonly credit card receipts). The lender withdraws a fixed percentage (a ‘‘holdback’’) from daily or weekly card sales until the agreed repayment (often expressed as a factor rate) is satisfied. Many MCAs are structured as a purchase of receivables rather than a traditional loan; that affects contracts and sometimes tax treatment.

• Business line of credit (LOC): A lender approves a maximum credit limit. You draw funds, repay, and redraw up to that limit during a draw period. Interest accrues only on the outstanding balance. LOCs are usually secured or unsecured, and approvals often involve credit checks, financial statements, and covenants for larger limits.

(Side note: See our deeper explanations on merchant cash advance and business line of credit for product-specific details: merchant cash advance and business line of credit.)

Repayment, cash-flow impact, and accounting

• Frequency: MCAs withdraw daily/weekly; LOCs usually require monthly payments. Daily remittances are harder on a thin-margin business because you can’t control timing—sales dips still reduce available cash.

• Predictability: LOC payments are predictable and modelable; MCA repayments fluctuate with sales volume but are fixed as a percentage of receipts, which can accelerate total repayment when sales rise.

• Accounting and tax: Because MCAs are often structured as a sale of receivables, some providers and borrowers don’t treat the cost as ‘‘interest.’’ This complicates tax treatment. By contrast, interest on a traditional LOC is generally deductible as a business expense when it meets IRS rules (see IRS Publication 535). Always confirm how a particular advance is documented and check with a tax advisor.

True cost: factor rates, APRs, and how to compare offers

MCA pricing is commonly expressed as a factor rate (for example, 1.20 or 1.35), not APR. A factor rate means you repay the advance multiplied by that factor: a $10,000 advance with a 1.30 factor requires $13,000 total repayment. Because the payback term for MCAs is short and the repayment frequency high, the APR-equivalent can be very high—often materially higher than the headline factor suggests.

To compare:

1. Ask the MCA provider for an APR-equivalent or use an APR calculator that models the actual daily cash flows. Lenders should provide clear repayment schedules.
2. Compare total dollars repaid over the actual time in business days or months—not just the factor.
3. For LOCs, compare interest rate (fixed or variable), fees (draw fees, unused-line fees, annual fees), and any collateral or personal guarantee requirements.

Example (illustrative): A $10,000 MCA with a 1.25 factor repaid over 120 days via daily holdbacks will often translate to an APR well above 60–80% once annualized; by contrast, a small business LOC with a 12% APR will cost far less over the same period. (For customer-specific APR math, run the exact cash-flow schedule through an APR/IRR calculator.)

Authoritative resources (SBA, CFPB) warn that MCAs can be among the costliest small-business finance options; always ask for APR-equivalents and an amortization schedule. (See: U.S. Small Business Administration and Consumer Financial Protection Bureau.)

Eligibility and underwriting differences

• MCAs: Underwriting focuses on daily card volume and revenue consistency; credit score matters less. This accessibility makes MCAs attractive to businesses with thin credit histories or recent credit issues.

• LOCs: Underwriting emphasizes credit score, business financials, tax returns, cash flow statements, and sometimes collateral. LOCs reward stronger financial profiles with lower rates and higher limits.

When each option makes sense (practical scenarios)

Choose an MCA if:

• You need cash within 24–72 hours and have steady, high credit-card volume.
• You can tolerate higher financing cost for a short period (e.g., a time-sensitive inventory purchase that will immediately generate revenue).
• You cannot qualify for an LOC and the only alternative is delaying critical operations.

Choose an LOC if:

• You need a flexible, lower-cost reserve for ongoing working capital, payroll smoothing, or planned expenses.
• You have reasonable credit and can provide basic financial documentation.
• Predictable monthly payments and lower financing costs are important to your business model.

In practice, many businesses keep a small LOC for planned needs and use short-term advances sparingly for emergencies—this hybrid approach allows both flexibility and cost control.

Risks, covenants, and legal considerations

• Holdbacks and processor control: MCAs often integrate with your payment processor or require you to route card receipts through a processor-controlled account. This can limit your control and speed collection for the funder.

• UCC-1 filings and liens: LOCs and other lenders may file UCC-1 financing statements or take collateral claims on inventory/accounts receivable. Confirm the scope of any lien and whether it’s senior to other creditors.

• Personal guarantees: Many nonbank lenders require personal guarantees for LOCs or MCA facilities, especially for small businesses. Expect personal liability in many cases.

• Stacking: Adding multiple MCAs or loan products (so-called stacking) can quickly reduce working capital and amplify risk. Avoid taking overlapping advances without a clear repayment plan.

Questions to ask before you borrow

• What is the total dollar repayment and the exact daily/monthly schedule? Can you get that in writing?
• Do you get an APR-equivalent for the MCA? If not, ask why.
• Are there prepayment penalties, origination fees, or hidden charges (e.g., retrieval or processing fees)?
• Will your processor or the lender control card remittances? For how long?
• Will the lender file a UCC-1 lien or require a personal guarantee?

How to get better terms

• Improve documentation: Profit and loss statements, bank statements, and a clear cash-flow plan improve your bargaining position for an LOC.
• Shop multiple offers: Compare factor rate + term for MCAs and APR + fees for LOCs. Negotiate holdback percent, factor rate, or line fees where possible.
• Consider alternatives: Short-term bank loans, SBA microloans or SBA 7(a) term loans, invoice factoring, or a business credit card may make more sense depending on cost and timing.

For more on LOC mechanics and interest, see our Business Line of Credit article and Commercial Line of Credit page.

Red flags and when to walk away

• No written repayment schedule or refusal to provide APR-equivalent.
• Unclear ownership of receivables or demands to reroute all deposits to a lender-controlled account indefinitely.
• High-pressure sales tactics pushing you to sign before you can consult an advisor.

Bottom line: how to decide

If time is critical and alternatives are unavailable, an MCA can be a useful stopgap—but plan how you will manage the daily remittances and model the impact on net cash. If you can qualify for a line of credit, it is usually the cheaper and more flexible option for ongoing needs.

I encourage business owners to run exact cash-flow schedules for any offer and to ask lenders for APR-equivalents in writing. In my practice, the clients who avoided costly surprises were those who (1) demanded full repayment schedules, (2) compared total dollars repaid, and (3) modeled the effect of daily remittances on payroll and vendor payments.

Professional disclaimer

This article is educational and does not constitute legal, tax, or financial advice. Tax treatment depends on how an advance is documented; consult a tax professional and your attorney before signing. For IRS guidance on business deductions, see IRS Publication 535. For small-business lending guidance, consult the U.S. Small Business Administration (sba.gov) and the Consumer Financial Protection Bureau (consumerfinance.gov).

Sources and further reading

• U.S. Small Business Administration (sba.gov) — guides on small-business loans and alternatives
• Consumer Financial Protection Bureau (consumerfinance.gov) — consumer protections and small-business lending resources
• IRS Publication 535 — Business Expenses

Internal resources:

• Merchant cash advance (https://finhelp.io/glossary/merchant-cash-advance/)
• Business line of credit (https://finhelp.io/glossary/business-line-of-credit/)
• Commercial Line of Credit (https://finhelp.io/glossary/commercial-line-of-credit/)

If you want, I can help you build a side-by-side spreadsheet to compare specific offers and calculate APR equivalents for the actual repayment schedules you receive.