Merchant Cash Advances: Why to Be Careful

A merchant cash advance (MCA) is not technically a loan. A company gives you cash today in exchange for a share of your future sales, collected daily or weekly from your bank account or card sales. MCAs are fast and easy to get. They are also among the most expensive forms of business financing.

How the cost works

MCAs use a factor rate instead of an interest rate.

Example: you receive $20,000 with a factor rate of 1.35. You repay 20,000 × 1.35 = $27,000. If it is repaid in 6 months through daily debits, that $7,000 cost on a short timeline works out to a very high annual cost, often far above any bank or SBA loan, and above most credit cards.

Warning signs

• Daily debits that squeeze your cash flow.
• Stacking: taking a second or third advance to pay the first. This is how many businesses get trapped.
• Contracts with confessions of judgment or aggressive collection terms.
• Brokers paid large commissions who push you to sign fast.

When an MCA might make sense

Rarely: a short emergency with a clear, fast way to repay, when nothing else is available. Even then, calculate the total cost first.

Better alternatives

Alternative	Why it’s better
SBA Express or 7(a)	Much lower cost, longer terms
Line of credit	Pay interest only on what you use
CDFI loan	Mission-driven, reasonable rates
Equipment financing	Lower cost when buying equipment
Invoice factoring	Tied to real invoices, often cheaper
Negotiating with suppliers	Trade credit costs little or nothing

Already stuck in MCAs?

Talk to an SBDC advisor (free) about your cash flow. Some businesses refinance MCA debt into an SBA 7(a), if they qualify. Don’t take a new advance to pay an old one.

Check whether you qualify for cheaper options with our quiz.

Frequently asked questions

Is a merchant cash advance a loan?

Technically no. It is a purchase of future sales, repaid through daily or weekly debits, and usually far more expensive than a loan.

What is a factor rate?

The multiplier used to set the total repayment. A $20,000 advance at 1.35 costs $27,000.

Can I refinance an MCA with an SBA loan?

Some businesses can, if they qualify for a 7(a). Talk to a lender or SBDC advisor.