How a merchant cash advance works
A merchant cash advance gives your business a lump sum now in exchange for a larger fixed amount paid back from future sales. The factor rate sets the total you owe. The holdback, a share of each day's card sales, or a fixed daily or weekly bank debit sets how fast it is paid. Paying faster does not lower the total, so the true cost can be very high.
Last updated: October 2026
The short version
- You get a lump sum now and pay back a larger, fixed amount.
- The factor rate sets the total you owe.
- A holdback on card sales or a fixed bank debit sets how fast you pay.
- Paying faster does not lower the total, so the effective cost can be very high.
What the CFPB says an MCA is
The Consumer Financial Protection Bureau describes it this way in its small business lending rule FAQs: "merchant cash advances are a form of financing for businesses that purport to be structured as a sale of potential future income."
The same FAQ explains that the merchant repays the advance plus an extra amount or multiple. That is taken either as a percentage of future revenue, such as daily card receipts (often called the holdback percentage), or as a fixed daily withdrawal. Payments come through the card processor or by ACH from the business bank account.
Because it is set up as a purchase of future sales, an MCA is not priced like a loan with an interest rate.
Factor rate: what sets the total you owe
The total you owe is the advance times the factor rate.
Example only: a $10,000 advance at a factor rate of 1.3 means $13,000 owed, a $3,000 cost.
That cost is fixed when you sign. Extra fees can come on top, so ask for every fee in writing before you agree.
Holdback or fixed debit: what sets the pace
There are two common ways payment is taken:
- A holdback: a percentage of daily card sales, so the payment rises and falls with your sales.
- A fixed debit: the same daily or weekly ACH debit from your bank account, whatever your sales are.
Many MCAs today use the fixed debit. If yours does, ask in writing whether and how the payment can be adjusted if sales drop. This is often called reconciliation.
Why paying faster makes it more expensive, not cheaper
The total is fixed, so the faster you pay it, the higher the effective annual cost. Use the cost of capital calculator to turn a factor rate and payback time into an annual rate you can compare with other options.
Ask whether paying early lowers the total. Often it does not unless the contract says so. A payoff balance request helps you get the exact figure in writing.
What you usually need to qualify
Funders usually ask for a business bank account, recent bank statements, a record of card sales and some time in business. Each funder sets its own rules.
Where MCAs go wrong: stacking and renewals
Trouble often starts when a business takes a second advance to cover the first, known as stacking, or accepts a renewal offer before the first advance is paid. Each new advance adds another fixed total and another daily payment.
If payments are already hard to keep up with, read behind on an MCA and how to refinance a merchant cash advance. This is general information, not legal advice.
Read the contract before you sign
Look for the total payback, every fee, how payments are taken and what happens if sales drop. Our guide to MCA contract clauses walks through the terms to check. Some states now require cost disclosures for this kind of funding; see state disclosure laws. This is general information, not legal advice.
How an MCA compares to other funding
- MCA vs business loan: a loan has an interest rate and a set term.
- Line of credit vs MCA: you draw only what you need and pay interest on what you use.
- SBA loan vs MCA: slower to get, but usually far cheaper.
- Business credit card vs MCA: good for short, small needs you can pay off soon.
- Equipment financing vs MCA: the equipment backs the financing.
- Invoice factoring vs MCA: you sell unpaid invoices instead of future card sales.
- Revenue-based financing vs MCA: also tied to revenue, with different terms.
See all merchant cash advance alternatives, and when you are deciding, read is a merchant cash advance a good idea.
Getting MCA broker calls?
Once you take or ask about an MCA, the calls often start. Here is how to stop MCA broker calls.
Every other way to fund your business
An MCA is one option among many, and often not the cheapest. See every way to fund your business.
For free help, try the FDIC's Money Smart for Small Business.
Sources
Checked on ConsumerFinance.gov and FDIC.gov in October 2026.
Last updated: October 2026