What to Ask Before Signing a Merchant Cash Advance Agreement

How a Merchant Cash Advance Agreement typically works

A provider advances cash to your business and takes a fixed amount back by collecting a percentage of your daily or weekly card sales (the “holdback”) or by automated debits from your bank account. Repayments continue until the provider collects the agreed-upon total repayment amount—often expressed as a factor rate rather than an interest rate—so there are no standard loan terms or APR disclosures.

Key questions to ask before you sign

• What is the total repayment amount? Explain whether the quoted number is the gross repayment (advance + fees) or just the fees. Ask the provider to show the math. This is the clearest way to compare offers.
• How is repayment collected and how often? Confirm whether the provider takes a percentage of card sales, daily ACH debits, or weekly withdrawals—and whether that changes on low-sales days.
• What is the holdback percentage or fixed payment amount? A higher holdback reduces daily cash flow and can stress operations during slow periods.
• How long is repayment expected to last under my historical sales? Ask the provider to model repayment using your recent monthly sales so you have an estimated duration.
• Is there a factor rate, and how does it translate to a true cost or APR? Factor rates are common; convert them to an annualized cost for apples-to-apples comparison (see our guide on How to Calculate True Cost of a Merchant Cash Advance).
• Are there additional fees or reserves? Ask about origination, underwriting, processing, chargeback reserve, maintenance, or termination fees.
• What happens if sales drop or accounts are frozen? Confirm remedies and whether the provider can accelerate collection or place a lien on bank accounts.
• Are there personal guarantees or cross-collateralization clauses? Some MCA contracts include personal recourse or require you to consent to an ACH pull from your operating account.
• Can I prepay or terminate early, and are there penalties? Many providers do not offer meaningful reductions for early repayment.

How to evaluate cost and cash-flow impact

• Convert factor rates into a simple example: if you take $50,000 with a 1.25 factor, total repayment is $62,500. How long it takes depends on your holdback percentage.
• Use your average daily card sales to estimate monthly payments and the repayment timeline. If the holdback is 20% and you average $10,000 of card sales monthly, monthly remittance would be ~$2,000.
• Read our primers on Understanding Factor Rates on Merchant Cash Advances and the true cost calculator guide to translate factor rates into annualized cost.

Red flags to watch for

• Vague or missing total repayment figures.
• Clauses that allow the funder to change the collection method or increase the holdback unilaterally.
• Mandatory arbitration, waiver of consumer protections, or automatic renewals without clear terms.
• Requests for broad access to your bank accounts or an unexplained reserve holdback.

Alternatives and when an MCA makes sense

Merchant cash advances can be appropriate for short-term, urgent needs where speed matters and you can tolerate reduced daily cash flow. But because MCAs are often costly, compare alternatives: term loans, lines of credit, invoice financing, SBA microloans, and revenue-based financing. See Short-Term Merchant Funding: Alternatives to High-Cost Advances for options and when they fit.

Real-world cautionary example

A café I advised received $250,000 via an MCA with a 1.5 factor and a 25% holdback. Strong summer sales made early months manageable, but a slow winter and fixed high holdback reduced operating cash and forced layoffs. Asking for a modeled repayment schedule and choosing a smaller advance or alternate financing would have reduced that strain.

Quick due diligence checklist

• Request the contract and a plain-language cost summary before signing.
• Ask for modeled repayment using your recent statements.
• Confirm whether any personal guarantees are required.
• Consult your CPA or small-business attorney about tax and legal implications.

FAQs

• Can an MCA hurt my credit? Typically MCAs are not reported like traditional loans, but missed obligations, forced collections, or personal guarantees can cause long-term financial harm.
• Are MCAs regulated? MCAs are not regulated like consumer loans; protections vary. The Consumer Financial Protection Bureau and state regulators have issued guidance and enforcement actions in the space—see CFPB resources for updates (Consumer Financial Protection Bureau).

Sources and next steps

This entry draws on industry practices and regulatory guidance. For government information and consumer protections, see the Consumer Financial Protection Bureau: https://www.consumerfinance.gov. For business lending alternatives, review SBA resources and consult a licensed financial professional.

Disclaimer: This information is educational and not individualized financial or legal advice. Consult your CPA, attorney, or a licensed lender before signing agreements. In my practice advising small businesses for 15+ years, careful comparison and modeled repayment schedules usually prevent the most common MCA pitfalls.