What is a merchant cash advance?

Without time-consuming credit checks and rigid repayment plans, merchant cash advance is perfectly suited to the fast-paced, unpredictable world of retail. Similar to a business loan, but with several important differences, a merchant cash advance or business cash advance may suit any company that receives the majority of its payments by card.

What is a merchant cash advance?

A merchant cash advance is a type of revenue-based business financing for companies that have a large amount of credit card sales. Your business gets quick access to revenue from sales and then repays it plus a fixed charged based on a percentage of your sales. Merchant cash advances can be set up as daily or weekly financing.

Merchant cash advances are designed to provide a temporary cashflow solution to business owners who might not be able to qualify for other types of financing. It’s typically fast, but it can be one of the more expensive business financing options out there.

How does a merchant cash advance work?

A merchant cash advance is a type of working capital financing that works a lot like a short-term business loan. You apply for a one-time sum, typically based on your monthly credit card sales. Your business then pays this back plus a fee that your lender determines by something called a factor rate or factor fee.

Instead of making fixed installment payments, your business then pays off the loan with a percentage of each credit card transaction, sometimes called the holdback. Holdbacks typically range from 10% to 20% of each sale. So how long it takes to pay back your loan is determined by your holdback rate and your sales — not a set loan term.

Some companies also have a minimum monthly payment that your business must make even if it doesn’t have any sales. Many have a maximum amount of time your business can take to repay a merchant cash advance, typically around one year.

Factor rates explained

A factor rate is a number above 1 that your lender uses to come up with your total loan cost. It does this by multiplying your factor rate by your loan amount. They typically range from 1.1 to 1.5, though some lender charge factor rates of 3 or even higher.

Let’s take a look at an example. Say your business qualifies for a $10,000 merchant cash advance from a lender at a factor rate of 1.15. Here’s how it breaks down:

• How much your business receives: $10,000
• How much your business owes: $11,500

Is my business eligible for a merchant cash advance?

Merchant cash advances are ideal for retailers and e-commerce businesses. But any business with a high volume of credit card sales might be able to qualify.

This can even mean young businesses and owners with poor credit. Some merchant cash advance companies are even willing to work with businesses that have been around for as little as three months. However, you can’t use a merchant cash advance to access quick cash-flow loans to fund your startup — qualification typically depends on your business’s credit card sales record.

What are the benefits of a merchant cash advance?

• It’s quick and efficient. Unlike business loans that can take months to be approved, a merchant cash advance can provide you with much-needed funds in a couple of weeks or less.
• Collateral isn’t required. You don’t need to provide any business or personal assets to be approved in order to qualify for a merchant cash advance.
• There’s no credit check. While this isn’t guaranteed, advances for smaller amounts can regularly be obtained with a less-than-perfect credit score.
• Repayments are based on sales. The amount you repay changes according to your earnings. This ensures small companies with changing levels of income don’t get caught out with fixed repayments.

Are there any drawbacks?

• It’s expensive. With terms typically hovering around one year, even the least expensive merchant cash advances can cost the equivalent of a triple-digit APR — high even compared to other types of bad credit business financing.
• You can’t save by prepaying. The factor rate applies no matter how long your business takes to pay back the advance, meaning that paying early won’t save you anything.
• There’s a lack of regulation. Merchant cash advances aren’t regulated by federal banking laws, so regulations vary by state.
• It’s not a long-term solution. Merchant cash advance plans usually last no longer than 12 months. Along with the cost, this means they are unlikely to provide positive results other than for a short period.
• It can be risky. While past sales information should be an accurate indicator of future sales, industries such as retail and hospitality can be fickle. If your business can no longer pay off the advance, you will need to find the repayment money elsewhere.

Compare more business loans from top lenders

Explore your options by loan amount, APR and requirements. Select the Go to site button for more information about a particular lender.

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Product USFBL	Finder Score	Min. Amount	Max. Amount	APR	Requirements
Olympus Business Capital	Finder score 9 Excellent	$500	$250,000	Not stated	Been in business for 6 months registered with the state, active and open bank account in business name, have $10,000 of revenue each month	No credit needed. Funding up to $250,000 with a variety of finance options to best fit your business needs.	Go to site Compare	loading Fetching your data…
Lendio business loans	Finder score 9.6 Excellent	$1,000	$10,000,000	Varies by lender	Operate business in US or Canada for 6 months or more, have a business bank account, minimum 520 personal credit score, at least $8,000 in monthly revenue.	Submit one simple application to potentially get offers from a network of over 75 legit business lenders.	Go to site Compare	loading Fetching your data…
Fundera business loans	Finder score 8.6 Great	$2,500	$5,000,000	Varies based on lenders	$60,000+ of annual revenue, 550+ personal credit score, in business for 6+ months	Get connected with short-term funding, SBA loans, lines of credit and more.	Go to site Compare	loading Fetching your data…
National Funding business loans	Finder score 9.6 Excellent	$5,000	$500,000	Undisclosed	In business 6+ months and make at least $250,000 in annual sales. Other loan types have additional requirements.	Working capital loans and equipment financing, some high-risk industries may be eligible.	Go to site Compare	loading Fetching your data…
American Express® Business Line of Credit	Finder score 8 Great	$2,000	$250,000	N/A	Minimum FICO score of at least 660 at the time of application, have started your business at least a year ago, and an average monthly revenue of at least $3,000	Access lines of credit for your small business even if you aren’t currently an Amex customer.	Go to site Compare	loading Fetching your data…

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Anything else to watch out for?

Merchant cash advances are often referred to as business payday loans — and for good reason. With no federal regulation, your lender has a lot more leeway when it comes to how much it can charge you and how it discloses its fees. Watch out for complicated contracts that are difficult to follow — your lender might be trying to hide something. If possible, take some time to review your contract and ask an expert if there’s anything that isn’t clear.

The lack of federal regulation also means that lenders need to meet state requirements to legally offer financing. Double-check to make sure your lender is able to lend in your area before applying for a loan.

How does the application work?

The application is often simple, meaning that it often has a faster turnaround time than other types of business financing. Lenders typically only have a monthly or annual sales requirement and accept all credit types. Some might not even run a credit check for smaller advances.

Often, you can apply online by filling out a quick application. Once your application has been approved, some lenders might ask you to open a separate bank account known as a “pass through” account. You can then use this for processing any transactions and the lender can collect their share. Others might simply ask for access to your business’s bank or Paypal account to withdraw the repayments.

Merchant cash advance alternatives

Don’t think a merchant cash advance is right for your business? Consider these alternatives instead.

• Cash flow loans. A cash flow loan, also often referred to as an ACH loan or revenue-based financing, works like a merchant cash advance but is based on your business’s daily bank deposits rather than credit card sales.
• Asset-based financing. Can’t qualify for an unsecured business loan? Backing your loan with your business and personal assets can help you get access to more funding, typically 80% or 90% of your assets’s value.
• Alternative business loans. Some lenders offer alternative short-term business loans that work a lot like a merchant cash advance. But daily repayments are fixed instead of a percentage of your deposits or credit card sales.
• Invoice factoring. Need a cashflow fix but work with other businesses or government agencies? Get an advance on your unpaid invoices by selling them to a factoring company at a discount. There are several different types of invoice factoring.
• Invoice financing. Use your business’s unpaid invoices to back short-term business loan and repay it as your customers pay you.
• Short-term business loans. If your business needs money up front and doesn’t rely on customer sales, many alternative lenders offer short-term loans that work a lot like merchant cash advances but come with repayments in fixed installments.

Bottom line

Merchant cash advances might be an easy way to get cash when your business is facing a seasonal dip in sales. It’s also one of the few options that doesn’t require a credit check. But the high cost and lack of regulation might make you want to consider other options first. You can get started by checking out our business loans guide.

Frequently asked questions about merchant cash advances

What happens if I default on a merchant cash advance?

If your business has a slower-than-expected season and can’t make the minimum monthly payments, your merchant cash advance company could file a lawsuit against it for breach of contract. If you lose the lawsuit, a judge might order you or your business to pay back what you owe. However, since a merchant cash advance is an unsecured loan, it can’t collect any of your assets unless it files a lawsuit.

Is a merchant cash advance a loan?

Technically, no. Merchant cash advances are considered a cash advance rather than a loan, part of the reason why there’s so little regulation.

What can I use the funds from a merchant advance for?

You can use the funds from a merchant advance for any legitimate business purpose.

Are there any other fees?

It depends on the lender. Some lenders charge application or origination fees, which are rolled into the total cost of the loan. You might also have to pay a fee if your business doesn’t meet its monthly minimum or pay back the loan on time.

Does taking out a merchant advance help build business credit?

No. Merchant advance lenders do not report to any of the credit bureaus, so taking out a merchant advance will not affect your business credit.

How do I accept credit card payments for my business?

It depends on your business needs. Check out our full guide on setting up credit card payments for your business.

Written by

Anna Serio

Editor

Anna Serio was a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY. See full bio

Anna's expertise

Anna has written 178 Finder guides across topics including:

• Personal, business, student and car loans
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