A merchant cash advance (MCA) = lump sum payment to a business in exchange for a percentage of future credit card sales or daily revenue.

Unlike loans, MCAs have no fixed term—repayment speed depends on sales volume.

Cost is expressed as a "factor rate" (1.1-1.5x) instead of APR, making true cost harder to compare.

**How MCA works**: 1.

Business receives lump sum: $50,000 2.

Factor rate applied: 1.30 (common rate) 3.

Total repayment = $50,000 × 1.30 = $65,000 4.

Daily holdback: 10% of daily credit card sales until $65,000 paid.

**Factor rate breakdown** (typical ranges 2025): - Low risk (excellent credit, high sales): 1.10-1.20 (10-20% fee) - Medium risk (fair credit, moderate sales): 1.20-1.35 (20-35% fee) - High risk (poor credit, inconsistent sales): 1.35-1.50+ (35-50%+ fee).

**True APR calculation** (often shocking): Factor rates disguise annual percentage rates.

A 1.30 factor rate repaid in 6 months = **78% APR**.

**APR conversion formula**: APR = [(Factor Rate - 1) ÷ Payback Period in Years] × 100.

Example: $50k MCA, factor 1.30, repaid in 4 months: - Fee = $50k × (1.30 - 1) = $15,000 - Payback period = 4 months = 0.33 years - APR = ($15k ÷ $50k) ÷ 0.33 = 90.9% APR.

**Cost comparison table** (6-month repayment):.

| Factor Rate | Fee % | Effective APR | Cost on $50k | |------------|-------|---------------|-------------| | 1.10 | 10% | 20% | $5,000 | | 1.20 | 20% | 40% | $10,000 | | 1.30 | 30% | 60% | $15,000 | | 1.40 | 40% | 80% | $20,000 | | 1.50 | 50% | 100% | $25,000 |.

**Hidden costs beyond factor rate**:.

**Holdback percentage impact** (on $50k MCA, $10k/day sales): - 5% holdback = $500/day payment, 130 days to repay - 10% holdback = $1,000/day payment, 65 days to repay - 20% holdback = $2,000/day payment, 32.5 days to repay.

**When MCAs cost the MOST** (avoid these scenarios): - Fast repayment (under 3 months) = APR can exceed 200% - Stacking multiple MCAs = compounding fees, 300%+ effective rates - Slow sales periods = prolonged repayment, ongoing daily deductions hurt operations.

**Real-world cost example**: Restaurant gets $100k MCA, factor 1.35, 15% daily holdback on $5k/day credit card sales: - Total repayment: $135,000 - Daily payment: $750 (15% of $5k) - Payback period: 180 days (6 months) - Effective APR: 70% - **Comparison to term loan**: 10% APR business loan = $102,500 repayment, **saves $32,500**.

**2025 MCA industry standards**: - Average factor rate: 1.25 (25% fee) - Typical holdback: 10-15% of daily sales - Average advance: $25,000-$150,000 - Approval time: 24-72 hours (faster than traditional loans) - Credit requirements: Minimum 500 credit score, $10k+/month revenue.

MCAs are worth it ONLY for urgent cash needs when traditional financing is unavailable and you can repay quickly (under 3 months).

For most businesses, term loans, lines of credit, or SBA loans are 3-10x cheaper.

Calculate the true cost before signing.

**When MCA makes sense** (limited scenarios):.

**When MCA is a BAD idea** (most cases):.

**Cost comparison table** ($50k financing, 12-month term):.

| Financing Type | APR | Total Repayment | Monthly Payment | |---------------|-----|-----------------|----------------| | SBA 7(a) Loan | 11-13% | $53,300 | $4,442 | | Bank Term Loan | 8-12% | $52,600 | $4,383 | | Business Line of Credit | 10-15% | $53,750 | $4,479 | | Equipment Financing | 6-10% | $52,000 | $4,333 | | Invoice Factoring | 15-30% | $57,500 | $4,792 | | **Merchant Cash Advance** | **60-150%** | **$65,000-$80,000** | **N/A (daily)** |.

**Break-even analysis** (when is MCA worth the higher cost?):.

MCA is financially justifiable if: - Additional profit from immediate cash > MCA cost.

Example: Restaurant equipment breaks, losing $500/day revenue - MCA: $20k at 1.25 factor = $25k repayment ($5k cost) - Lost revenue waiting for bank loan (30 days): $500 × 30 = $15,000 - **Net benefit**: $15k saved revenue - $5k MCA cost = $10k gain.

**Alternatives to consider first**:.

**Red flags to avoid MCA entirely**: - Factor rate >1.40 (40%+ fee) - Early payoff penalties - Confessions of judgment clauses (creditor can seize assets without court) - Stacking offers (multiple simultaneous MCAs) - Brokers charging >2% origination fees.

**2025 regulation changes**: - California (SB 1235): MCAs must disclose APR and total cost - New York: MCA providers must register, follow disclosure rules - Federal Truth in Lending Act: May extend to MCAs (pending legislation).

**Bottom line decision framework**: - Emergency + repay <90 days + no alternatives = Consider MCA - Planned expense + good credit + time to apply = Avoid MCA, use traditional loan - Poor credit + 6+ month need + consistent sales = Try online lenders (OnDeck, BlueVine) before MCA.