What is a Merchant Cash Advance?

E.J. Simonsen | Feb 28, 2022

There's a lot of swirling information out there about merchant cash advances. Some resources say it's a great alternative to a traditional loan, while others tell you to keep your business as far away from an MCA as possible. So what's fact, and what's fiction? 

Let's take a closer look at what a merchant cash advance is, and why it's probably not a great option for your business. 

What is a Merchant Cash Advance?

A merchant cash advance is an unconventional finance product where a business is given a near-instant cash advance in exchange for repayment from future sales. 

If you're familiar with receivables factoring, MCAs do seem similar, except that instead of selling specific receivables, your business is borrowing against the money you plan to make. That's part of what makes an MCA so risky. 

The other factor here is that merchant cash advance creditors claim not to be giving "loans" in an attempt to avoid interest rate caps. Without regulation, this means the MCA creditor can require your business to begin payments immediately and can demand higher than 250% APR. 

How Did Merchant Cash Advances Become So Widespread? 

It's an unfortunate truth that businesses across the country have fallen prey to merchant cash advances. But if they're so risky, how did they become available in the first place?

In the aftermath of the 2008 financial crisis, traditional bank loans weren't as readily available for less established small businesses. Even SBA loans are out of reach or too cumbersome for many, leaving owners no alternative but to rely on more expensive and riskier alternative financing options such as credit cards, invoice factoring, and merchant cash advances (MCA). 

It is estimated that over $15 billion worth of alternative loans were funded in 2017 and those figures are expected to continue to grow. For more information on how merchant cash advances became legal in the first place, we recommend this informative deep dive completed by Bloomberg: Sign Here to Lose Everything.

These often unsolicited loans are aggressively peddled by non-traditional lenders who prey on desperate business owners so intent on keeping their businesses afloat they fail to see the hidden risks they are taking. That's why MCAs have become so widespread — at the surface, they seem like a good idea, especially to a business owner at the end of their rope.

Unfortunately, once sucked in by the first loan, it can be nearly impossible to get out of a merchant cash advance due to high fees and even higher interest rates. 

Even business owners who make their payments on time can fall victim to these unscrupulous lenders' practices. And if you find yourself taking out a second loan to help pay the first—a practice known as loan stacking—your livelihood is now in a death spiral!

Why Would A Business Take a Merchant Cash Advance in the First Place?

As a small business owner, you know managing cash flow is tough. Unless you're following Dave Ramsey's plan on how to run a debt-free business, you probably rely on debt as a necessary part of operating your company. But if these merchant cash advances are so bad, then why are so many businesses taking them?

An injection of capital can help you expand your business by hiring additional employees, acquiring new equipment, and purchasing inventory. It can also help you smooth out the slow months and make sure employees (and you) get paid. 

That promise, combined with the frequent lie that your business's payments will be correlated to the health of your business, can make it very easy for business owners to agree to an MCA lender's terms. 

The unfortunate side to this decision is that most MCA creditors don't adhere to the principle that your payments should be correlated to the health of your business. Plus, the capital injection of an MCA comes at a big cost—250%+ APR in many cases, not to mention a whole host of additional negative effects. See more at What Happens If You Default on a Merchant Cash Advance?

So, What's the Truth About MCAs?

The truth about merchant cash advances is that 9 times out of 10, they're a bad business decision. 


  • MCAs are largely unregulated, which means there are few, if any protections, for your business from an MCA lender. As mentioned earlier, even business owners who make their payments on time can fall victim to these unscrupulous lenders' practices
  • Repayment is typically made on a daily or weekly basis. As soon as you agree to an MCA, your business has to start making payments immediately. Can your business withstand huge daily or weekly payments?
  • Many MCA creditors have been shown to actively trap small businesses. Their goal is to get you to take out a reverse consolidation, and then continue running your business into the ground. 

Is an MCA Right for My Business?

If you've made it to this point in our article, it's probably pretty obvious that our answer to this question is NO!

While MCAs may offer some incremental, short-term benefits for small businesses, those benefits are significantly outweighed by the long-term consequences they can have on your business. 

Traditional short-term loans are always the better option if you're looking for a capital injection for your business. Better yet, talk to an experienced business debt relief attorney who can help you develop a solid financial plan that helps to move your business into the green (and keep it there!).

Worried about an MCA? Talk to a Business Debt Relief or Merchant Cash Advance Attorney

Whether your business is considering or has already taken out an MCA, if your business is in debt, it's best to talk to an experienced professional in your area. The Lane Law Firm's business debt relief attorneys work to help clients resolve issues related to merchant cash advances every day. We're here to help you, too. Get in touch with our team or schedule a time for your free case review today!

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