What is a merchant cash advance (MCA)?

How lenders use it

MCA funders decide fast and lean on the bank statements. They usually ask for three to six months. They look at average daily balance, the size and spread of deposits, overdraft and returned-payment counts, and how steady revenue is from month to month.

The advance is priced with a factor rate, such as 1.3 or 1.4. The business repays the advance multiplied by that rate. Unlike a loan, the cost does not fall if the business pays early, unless the contract has a discount.

Stacking is the main risk funders watch. It means a business takes a second or third advance on the same revenue before the first is repaid. Each advance takes a daily debit, so cash left over shrinks. Funders look for daily debits to other funders in the bank statements. They also search for liens filed under the Uniform Commercial Code (UCC) and read the applicant's own list of existing advances.

Because an MCA is structured as a purchase of future sales and not as a loan, several US states regulate it differently. Some, including California and New York, now require commercial financing disclosures. A funder's compliance team should check the rules in each state where it works.

The same product is sold in the UK. It is often repaid from card sales taken through a payment terminal.

Worked example

Example only. A funder advances $50,000 at a factor rate of 1.35. The business repays $67,500. The cost is $17,500.

If the business repays that in about six months, the cost works out to an annual rate above 100% when compared with a loan. The same advance repaid over 12 months would cost less per year. Factor rates are easy to compare only if the term is the same.

Common confusions

A factor rate is not an interest rate. It is a multiplier on the amount advanced. To compare an MCA with a loan, convert the cost to an annual rate using the real repayment dates.

An MCA is not revenue-based financing. An MCA is usually short and is repaid by daily debits or a split of card sales. Revenue-based financing usually runs longer and takes a monthly share of revenue until a repayment cap is reached.

An MCA is not invoice finance. The funder buys future sales in general. An invoice finance provider advances against specific invoices that already exist.

Questions lenders ask

How does MCA underwriting work?

The funder reads recent bank statements and card processing statements. It checks deposit volume, daily balances, returned payments and existing advances. Credit score and time in business are usually secondary. A person then sets the advance and the factor rate.

What is MCA stacking?

Stacking is taking more than one merchant cash advance at the same time. Each one takes its own daily debit from the same revenue. It raises the chance that the business cannot pay any of them.

How do funders spot stacking?

They look for daily or weekly debits to other funders in the bank statements, search UCC filings and ask the applicant to list all current advances. Some also use a shared database of positions.

Is a merchant cash advance a loan?

In most US states it is treated as a purchase of future receivables and not a loan. That is why usury limits often do not apply. Several states now require disclosures that show the total cost. The legal view can differ by state and by contract.

Revenue-based financing: Funding repaid as a share of monthly revenue
Stips (stipulations): Documents a lender needs before it funds
Alternative lender: A lender that is not a high street bank
Working capital loan: Short-term funding for day-to-day costs

This page is general information for lenders. It is not legal, tax or credit advice.