9 Alternatives to Merchant Cash Advances (MCAs)

For some business owners, merchant cash advances (MCAs) seem like a quick fix for cash flow issues. They can work in some situations, but most MCAs are expensive, have unpredictable repayment schedules, and lack transparency.

Fortunately, there are plenty of alternatives to merchant cash advances—with better terms, lower costs, and more flexibility. Check out this guide to learn how MCAs work and why they’re risky. We’ll also share eight of the best merchant cash advance alternatives to help you find the right funding sources for your business without the financial strain.

What Is a Merchant Cash Advance?

A merchant cash advance is a type of financing that provides fast cash in exchange for a portion of a business’s future sales. MCAs aren’t technically a loan but an advance on what you expect to earn.

For example, let’s say you borrow $2,500 upfront. The MCA provider will automatically deduct repayment from your sales on either a weekly or even daily basis. They charge a holdback retrieval rate on all of these sales, which ranges from 5% to 20% on average.

Improving working capital isn’t easy. Getting the financing you need can be a hassle, from finicky loan terms to worrying about approvals. Because of this, it makes sense why many business owners turn to merchant cash advances. Merchant cash advances have an average approval rate of 80% and take less time to apply for than a bank loan.

An MCA could sound appealing if you have variable income or a lot of seasonality in your business. It doesn’t require any collateral and has flexible repayment terms based on your sales volume. The repayment terms tend to be much shorter than traditional loans, so you don’t have to worry about carrying long-term liabilities.

Why Are MCAs Risky?

Merchant cash advances sound great, but like any funding solution, they have pros and cons. MCAs are a risky choice for several reasons, including:

• High costs: MCAs are notorious for charging incredibly high rates. The factor rates they use translate into annual percentage rates (APRs) that are much higher than merchant cash advance alternatives. In other words, you’ll pay so many fees that the MCA probably isn’t worth it.
• Repayment structures: Merchant cash advances don’t charge fixed monthly payments, like traditional bank loans. They’re tied to your sales revenue. This repayment structure can cause strain if you’re experiencing a slow season or have inconsistent revenue, especially when you have other bills to pay.
• Lack of transparency: MCA agreements are difficult to understand. Many business owners sign up for MCAs without understanding the total cost until it’s too late. These tricky terms make MCAs confusing, expensive, and unpredictable.

Reasons You Might Want to Get Out of an MCA

MCAs can seem like a great lifeline when you need quick cash, but most business owners find that the drawbacks outweigh the benefits. You might want to get out of an MCA if:

• Payments are unmanageable: MCAs deduct payments directly from your daily or weekly sales. That’s not a big deal if you’re making a lot of sales right now, but if things are slow, the deductions could leave you with little left over.
• You can’t grow your business: MCAs are among the most expensive financing options, making it difficult for companies to save the cash they need to scale. There’s little room to reinvest in your business, which can have a big impact on your profitability.
• You need to build credit: Remember, merchant cash advances aren’t traditional loans. They won’t build your credit like a traditional loan. If your business has no credit (or poor credit), an MCA could set you back.
• You’re paying hidden fees: Many MCAs come with hidden fees or confusing terms that business owners don’t fully understand until repayment begins. This lack of transparency is a common reason why entrepreneurs look for merchant cash advance alternatives that offer more straightforward terms.

Fortunately, there are ways to get out of a merchant cash advance.

8 Alternatives to Merchant Cash Advances

Merchant cash advances are a popular type of alternative lending, but they aren’t your only option. Consider these eight alternatives to merchant cash advances to fund your business without the high costs or “gotcha” contract terms.

1. Invoice Factoring

Invoice factoring is a lower-cost way to unlock value from your outstanding invoices. With invoice factoring, you sell an unpaid invoice to a factoring company and receive immediate cash, sometimes up to 90% of the invoice value.

You get to use the money however you see fit, and the factoring company collects invoice payments from your customer. When the customer pays, you receive the remaining balance minus a modest factoring fee. Best of all, you can choose which invoices you want to factor, so this is a flexible alternative to merchant cash advances.

However, keep in mind that you need outstanding invoices to factor. MCAs could be more practical if you have a retail store because they charge by transaction, but the below MCA alternatives will likely be cheaper.

2. Traditional Bank Loan

A traditional bank loan is the go-to for many businesses. Bank loans offer lower interest rates and fixed repayment schedules, but this form of debt financing means you’re on the hook for years.

You also need good credit to score decent terms. Businesses with bad credit should instead look at MCA alternatives like invoice factoring, grants, or crowdfunding. Still, a traditional bank loan could be a good fit if your business does have a proven track record and you don’t mind the debt incurred.

3. Line of Credit

A business line of credit allows you to borrow only what you need and repay based on what you borrow. Instead of a traditional loan, which gives you a lump sum, this merchant cash advance alternative has lower interest rates and revolving terms.

For example, you can secure a line of credit of $100,000, borrow $20,000, and only pay interest on the $20,000 you borrowed. Not only does a line of credit give you a flexible option to grow your business, but having one in place can also help you cover big, unexpected expenses or balance out seasonal cash flow issues.

4. SBA Loan

The Small Business Administration (SBA) offers low-interest loans to qualifying small businesses. The upside is that approvals are fast, with 39% of banks approving small, simple loans within a single business day. These loans offer competitive rates, longer repayment terms, and larger funding amounts, making them one of the best merchant cash advance alternatives.

Still, there are downsides to SBA loans. While they have favorable loan terms for small businesses, the application process is lengthy and complex. You also need a solid credit history to secure this government-backed loan.

5. Asset-Based Loan

Asset-based loans require you to put up collateral, like a house or equipment, to secure a loan. This MCA alternative is ideal for businesses with valuable assets that can back the loan. Since you’re offering collateral, many lenders will extend asset-based loans even if you have bad credit.

With lower interest rates and more predictable repayment terms, asset-based loans offer a stable and reliable funding solution compared to MCAs. However, you’ll lose your assets if you fail to pay the loan, so this MCA alternative can be risky. Ensure you’re able to make the loan payments before signing a contract.

6. Equipment Financing (or Inventory Financing)

Equipment financing (also known as inventory financing) is a stricter form of funding where you request financing only for specific equipment or inventory. This merchant cash advance alternative focuses on the value of the asset you’re buying, which the loan uses as collateral, like asset-based loans. Equipment financing isn’t a fit for all businesses, but it could be a good MCA alternative if you need to upgrade old equipment or purchase new inventory.

7. Equipment Leasing

Most of the MCA alternatives on this list require going into debt. However, leasing is a great way to preserve cash flow without interrupting business operations. Instead of purchasing equipment outright, equipment leasing allows businesses to rent the tools and machinery they need. Best of all, most leasing terms include maintenance, reducing costs even more.

8. Grants

There are plenty of ways to fund a business without a loan, and grants are one of the most sought-after. Grants are essentially “free money” that you don’t have to pay back. Unfortunately, there’s a lot of competition for grants, and they often have lengthy application processes. However, it can’t hurt to apply for grants you qualify for, especially since they don’t require repayment. Explore opportunities offered by nonprofits, government organizations, or industry-specific bodies.

9. Crowdfunding

Crowdfunding raises money for a business by gathering contributions from a large group of people. Platforms like GoFundMe are popular for startups that need seed funding but don’t want to give up equity. Unlike MCAs, crowdfunding doesn’t require repayment if it’s structured as a donation-based or rewards-based campaign, making it a low-risk way to secure funds. However, you need serious marketing resources to encourage enough people to back your project.

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In-Summary: MCA Alternatives

Merchant cash advances have been around for over 15 years. But in that time, many business owners have fallen prey to confusing terms and unmanageable costs. MCAs can sometimes work out, but they aren’t ideal for building a profitable business in the long run. By exploring the best merchant cash advance alternatives, you can find a funding option that aligns with your financial goals and sets your business up for success.