Overview

Merchant Cash Advances deliver fast cash to businesses by advancing funds against future card receipts. They are underwriting- and speed-focused: lenders look at daily or monthly card volume instead of relying solely on credit scores. Factor rates are central to an MCA: they define the fixed total you must repay (advance × factor rate) and are not expressed as traditional interest rates. (See Consumer Financial Protection Bureau guidance on alternative small-business products for context: https://www.consumerfinance.gov.)

How factor rates work (simple math and example)

  • The factor rate is a multiplier applied to the advance to calculate total repayment.
  • Example: $50,000 advance × 1.3 factor rate = $65,000 total repayment (cost = $15,000).

Translating factor rates to an APR estimate (illustrative)

Factor rates do not equal APR, because MCAs are repaid faster and by percentage of sales. To estimate an APR, you must know the effective time to repay. Example approximations:

  • If the $50,000 advance with a 1.3 factor repays in 6 months: cost $15,000 on $50,000 over 0.5 years → approximate APR ≈ 60%.
  • If the same advance repays in 12 months: approximate APR ≈ 30%.

These are illustrative conversions. Actual APR calculations require precise cash-flow timing; see our detailed guidance on converting factor rates to APR: Short-Term Merchant Cash Advances: How Factor Rates Translate to APR.

Common ranges and variability

Factor rates commonly fall between roughly 1.1 and 1.5, but they can be higher for higher-risk businesses or for very short-term advances. The effective cost depends heavily on how quickly you repay the advance and on daily holdbacks or fixed daily/weekly remittances. The Consumer Financial Protection Bureau warns that alternative small-business financing can result in very high effective APRs for borrowers (CFPB).

Key terms that affect repayment

  • Holdback percentage / daily remittance: the share of card sales the processor withholds each day.
  • Retrieval period: how long it typically takes to repay the advance (affects effective APR).
  • Reserve or fixed daily payment: some products use a fixed daily payback rather than a percentage.

How MCAs are used and who qualifies

MCAs are most common with restaurants, retail businesses, service providers, and other merchants with steady card volumes. Underwriting prioritizes payment processing history and deposit patterns instead of or in addition to business credit. In my practice, an MCA helped a restaurant cover an urgent repair, but the owner later needed to rework cash-flow plans once the holdback reduced daily operating liquidity.

Pros and cons (practical checklist)

Pros:

  • Speed: funding can arrive in days.
  • Flexible underwriting: accessible with thin credit profiles.
  • Payments adjust with sales (if percentage-based).

Cons:

  • Cost: factor rates can lead to very high effective APRs, especially for short repayment windows.
  • Cash-flow pressure: daily remittances reduce working capital.
  • Limited consumer protections and variable contract terms compared with bank loans (see CFPB guidance).

Red flags and contract terms to watch for

  • Unclear factor-rate disclosure or descriptions that bury the multiplier in fine print.
  • Non‑proportional payments (fixed daily payments that don’t shrink if sales fall).
  • Prepayment terms that do not reduce the stated repayment amount.
  • Cross-default clauses or liens on business bank accounts.

Professional tips before signing

Alternatives to MCAs

  • Traditional bank term loans or SBA microloans (often lower-cost but slower). See U.S. Small Business Administration resources: https://www.sba.gov.
  • Business lines of credit, invoice financing, or short-term installment loans, which may offer clearer APR pricing and more borrower protections.

FAQs (brief)

  • Are MCAs loans? They are a cash advance product, not a traditional term loan; repayment is structured as a purchase of future receivables or a revenue-share.
  • Will faster repayment always lower cost? Not always — some MCA contracts set a flat repayment amount; confirm prepayment terms before signing.

Sources and further reading

Professional disclaimer

This article is educational and does not constitute individualized financial or legal advice. Terms and laws change; consult a qualified financial advisor or attorney for help evaluating a specific Merchant Cash Advance offer.