Last Updated July 2, 2025
For small businesses with poor or no credit history, a merchant cash advance (or MCA) may seem like a viable choice. Though while a merchant cash advance can help you get cash quickly, it can be riskier and more expensive than other options.
It is important for small business owners to understand how this MCAs can affect their cash flow, especially in comparison to other lending options that carry a lower risk. With this in mind, keep reading for a complete guide to how MCAs work and what to look out for before signing a contract.
What Is a Merchant Cash Advance?
A merchant cash advance for small business is similar to a paycheck advance for individuals. A business receives a lump sum payment in advance, and then the loan is paid back as the business makes sales to its customers.
Rather than making traditional loan repayments, however, the business repays the MCA funding by allowing the lender to withdraw a percentage of its credit or debit sales. These withdrawals are made daily or weekly. Merchant cash advances are typically used by businesses with low credit scores, which prevents them from qualifying for other lending options.
How Does Merchant Cash Advance Lending Work?
MCA lending applications tend to be processed quickly, as many merchant cash advance lenders have low (or no) credit score requirements. However, these types of loans typically still have some eligibility requirements, such as a set period of time in business or a specific dollar amount of deposits that the business receives each month.
Loan terms and amounts can vary based on these and other factors, but usually provide $5,000 to $500,000 with a three- to 18-month repayment period. MCA lenders charge a factor worth 1.2 to 1.5 times the borrowed amount, while also adding other fees. Usually, the loan amount you qualify for is based on historic and expected sales volume.
After lenders determine eligibility, MCA cash will be provided to the business in a lump sum. The lender also sets up a system for collecting repayments as a percentage of the business’s credit or debit sales. MCA payments may be collected weekly or even daily, depending on the terms of the agreement and the business’s sales.
The lender will continue to collect a percentage of the business’s sales until the loan has been fully paid off.
Pros and Cons of a Merchant Cash Advance
Understanding merchant cash advance pros and cons is essential for determining if this lending option is worth considering for your business.
| Pros of MCAs | Cons of MCAs |
| Get money quickly | Can have very high borrowing rates |
| MCAs are unsecured loans | Contracts can be complicated due to lack of federal regulation |
| Repayments are tied to sales, rather than monthly payments | Can compromise your long-term cash flow |
| Credit checks usually aren’t required | Most MCAs require a personal guarantee |
Pros of MCA Lending
A merchant cash advance can be a good fit for your business, depending on the circumstances. The biggest advantage is that you can get the money you need much faster than you would with a traditional loan. Depending on the lender, you can get funding in less than 48 hours.
A big reason why MCA loans can be dispersed so quickly is that most MCA lenders don’t conduct a credit check. This is because the repayments are paid through your future sales, rather than a traditional loan payment.
The system of repaying through a percentage of sales can also add some flexibility to businesses. Rather than needing to worry about how they will afford to make a set payment each month, businesses can plan to have a percentage of their sales deducted each month until the loan is paid off. This means that in months when sales are slower, less is paid back to the lender, and that is fine with the terms of the agreement. You also won’t have to worry about late fees or pre-payment penalties like you would with some other loan products.
It’s also worth noting that MCA loans are unsecured, meaning they don’t require collateral. You don’t have to use business assets to secure the loan.
Cons of MCA Lending
While there are some pros to MCA lending, there are also many cons to taking on MCA debt. First, because these loans don’t require a credit check and are viewed as higher risk, they tend to have much higher borrowing rates than other comparable loans. APRs will typically be much higher than they would be with a conventional loan, meaning your business is spending a lot more to repay its debt. APRs can even reach triple digits.
Part of the problem with MCAs stems from the lack of federal regulation, especially since they are technically classified as commercial transactions instead of loans. This has led to some contracts being confusing, with predatory lenders using deceptive practices like hiding the annual percentage rate or requiring businesses to waive their rights to a legal defense. The classification of MCAs as a commercial transaction also means they generally won’t help build your business credit.
MCAs can also hurt your cash flow in the long run. Because many payback agreements require daily withdrawals based on your credit or debit sales, it can become difficult to keep enough cash flow to manage your other business operations, such as payroll or rent. Depending on your withdrawal amounts and other cash flow practices, you might need to take out additional loans.
Finally, most MCAs require a personal guarantee from the business owner. This means that if your business is unable to repay funds through its sales, you may be held personally liable for the debt.
Considerations Before Using an MCA to Finance Your Business
Because MCA financing can be rife with pitfalls, it’s important that you carefully consider factors specific to your business before signing an MCA agreement.
The most important thing you need to look at is your business’s specific financial situation. Evaluate your cash flow and the consistency of your revenue to determine if you could handle the daily or weekly repayments required by an MCA. Be mindful of how the factor rates and fees affect your APR and total costs in comparison to other financing options.
This is especially true if you don’t need immediate funding. Taking the time to explore other lending options, which may offer more favorable rates and repayment plans, might be a better long-term solution for your business.
Finally, you should make sure you understand the specific terms of the MCA agreement itself. APR rates, how to get out of a merchant cash advance, and other important factors may not be clear when reviewing a contract for the first time. Make sure you know what you’re agreeing to before you sign.
MCA Alternatives
There are several alternatives to MCA financing that can help you avoid the debt trap that is so common with this lending option.
Asset-based lending is a common choice for businesses with large borrowing needs, allowing them to use business assets like property or equipment as collateral for a loan. Asset-based lending often carries higher interest rates than a traditional bank loan, but can be easier to obtain since the funds are generally tied to the purchase of a specific asset that will be used as collateral.
For example, inventory financing allows companies to get funding assistance to buy products or raw materials that they will need to make sales. That inventory is used as collateral for the loan, making it easier to obtain funding. With predictable monthly payments, businesses can make debt repayment easier to plan for.
You can also look into non-loan funding options, such as grants, crowdfunding, or invoice factoring.
Invoice factoring can be an especially effective solution for established businesses, as it allows them to sell unpaid invoices for a cash advance. Rather than taking out a loan, businesses get the majority of the invoice value up front and then receive the rest after the factoring company collects payment (minus a factoring fee). This helps businesses make payroll, buy inventory, or pay rent without having to wait on customer payments. Better still, there are no debt repayments to worry about.
In-Summary: Merchant Cash Advances
While MCA loans can help businesses get cash quickly even if they have a poor credit history, they aren’t necessarily recommended. Because of the high fees and factoring rates, as well as daily or weekly withdrawals from credit or debit purchases, MCA loans can become very expensive for businesses. In some cases, these withdrawals can make it even more difficult to manage cash flow, creating new financial problems for the business and its owner, especially when confusing and sometimes predatory MCA agreements are involved.
Fortunately, even with limited credit history, businesses have other lending options that will be better suited to their long-term financial goals. Alternatives like inventory financing or invoice factoring can prove more manageable and make it easier to stay aligned with your financial goals. By considering the specific needs of your business, you can find an alternative funding option that works well for you.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
