How Merchant Cash Advance Works

Over the years, the merchant cash advance (MCA) market has grown significantly, with funders offering a variety of financing structures. While each funder may operate differently, certain aspects remain consistent across the industry.

Key Features of an MCA

• Advance Amount: Ranges from as little as $2,000 with smaller funders to as high as $2,000,000 with major funders.
• Payment Frequency: Repayments are typically deducted daily or weekly, depending on the agreement.
• Buy Rates: Rates can be as low as 1.14 for strong businesses, but riskier firms may see buy rates up to 1.40 or even 1.60.
• Time to Funding: Funding is fast, usually within 2 days, while larger amounts may take 5–7 days.

How to Apply for an MCA

Businesses apply for MCAs when they need quick capital or cannot qualify for traditional bank loans. Funders often accept credit scores as low as 550 (sometimes 520) and do not require collateral.

To apply, you’ll generally need:

• Bank statements for the last 4 months
• An active business bank account
• At least 1 year in business
• Minimum $100,000 in annual gross sales
• Credit score of 550 or higher

MCAs are often used to cover cash flow gaps, purchase inventory, expand operations, consolidate debt, handle emergencies, or invest in marketing and equipment upgrades.

History of the Merchant Cash Advance Industry

Although alternative financing dates back to the 1990s, MCAs became popular after the 2008 financial crisis, when banks tightened lending requirements. This created opportunities for MCA companies to provide fast financing to businesses with poor credit or little collateral.

While many funders operate with integrity, some exploit high rates and push businesses into unmanageable debt. Regulations have since been introduced to protect both borrowers and lenders.

Future of the MCA Industry

The MCA sector has already provided over $50 billion in working capital to small and mid-size businesses. With the rise of FinTech, new products such as reverse consolidations, credit card splits, and hybrid funding programs continue to emerge.

Partnerships with banks and credit card companies are expanding, while new regulations are being introduced to safeguard merchants from fraud and misuse.

Breaking Down the Costs

Borrowing costs can be much higher than they first appear. For example, a $75,000 advance with a 1.28 factor rate means repaying $96,000. If 15% of daily sales are deducted, this could result in an APR close to 97%.

While businesses may repay early in some cases, there are usually no major savings on factor rates.

Pros and Cons of an MCA

Before applying, it’s important to weigh both sides:

• Pros: Fast funding, simple application, approvals for lower credit scores, and flexibility in use.
• Cons: High costs, frequent repayments, limited cash flow, and little regulatory oversight.

MCA Programs Offered

Funders provide several MCA structures, depending on a merchant’s needs:

• Standard Cash Advance: Lump-sum deposit repaid via a percentage of daily/weekly credit card sales.
• Consolidation & Buyouts: Pay off multiple debts with a single repayment plan plus working capital.
• Reverse Consolidation: Helps cover monthly debt payments without refinancing or buyouts.
• Installment Funding: Provides funds in stages instead of all at once, helping balance cash flow.
• Credit Card Splits: Repayments directly tied to credit card transactions, ideal for card-heavy businesses.

As the industry evolves, more tailored programs continue to be developed to match business cash flow cycles—especially for seasonal businesses.