How Does a Merchant Cash Advance Work?

Merchant Cash Advance Process  

Business owners in need of quick access to capital now have a growing industry eager to fund them: merchant cash advance providers. Seeing as it has become more difficult to secure a traditional loan, many companies are turning to this type of funding to save their business. With a merchant cash advance, businesses can to turn tomorrow’s credit or debit card sales into today’s cash flow.

credit cards into cash

How it Works

Any business that accepts credit or debit cards is qualified for a merchant cash advance. In fact, most providers approve about 95 percent of qualified applications.

To determine their fee, merchant cash advance providers use a factor rate instead of an interest rate. In return for the lump sum, the customer agrees to pay back the balance with a percentage of their daily credit and debit card sales. There is no interest on the money borrowed, just a provider’s fee that is agreed upon by the provider and the customer right from the start.

In order to figure out the total amount to be paid back, you would multiply the advance amount by the factor rate to get the total repayment fee. The factor rate typically ranges from 1.14 to 1.48. Converted to APR, these rates often start at 15% but can move all the way into triple digits.

As an example, your restaurant needs $50,000 to buy a new oven. You apply and get approved for the full amount through a merchant cash advance. Your fee will then be determined by the factor rate. After you multiply the advance amount by the factor rate to get the total repayment fee, you are simply subtracting the advance amount from the total amount of repayment to determine the MCA fee:


In the case of the example above, a business that averages around $100,000 in credit and debit card revenue monthly could deduct 10 percent of their monthly credit and debit card sales. This would make the monthly repayment around $10,000 and give you the ability to completely repay the balance in 7 months.

The average length of repayment will be around 8 or 9 months, but the term can be as short as 4 months and as long as 18 months. Overall, the higher the percentage of your credit or debit card sales, the more you are repaying the lender, and the shorter your repayment time will be.

Learn More

Find out more about the ins and outs of a merchant cash advance by reading our Merchant Cash Advance Buyer’s Guide.

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