If you’re researching merchant cash advances, most of what you’ll find online is vague. This FAQ gives direct answers with real numbers — factor rate math, provider minimums, what happens at default, and when an MCA is not the right call.
TL;DR: MCAs are fast (24–72 hours), accessible (500 credit score), and expensive (40–350% effective APR). They work for high-card-volume businesses with genuine urgency and no cheaper alternative. For everything else, a term loan, line of credit, or SBA loan is significantly cheaper.
What Is a Merchant Cash Advance?
Is an MCA a loan?
No. An MCA is a purchase of future receivables — the provider buys a portion of your future revenue at a discount. This structure means MCAs are not subject to state usury laws or interest rate caps that would apply to loans. Courts have generally upheld this distinction as long as the provider bears meaningful risk that the receivables might not materialize (i.e., the repayment amount must flex somewhat with your revenue, not be a guaranteed fixed payment regardless of outcome).
How is an MCA different from a term loan or line of credit?
| Feature | MCA | Term Loan | Line of Credit |
|---|---|---|---|
| Cost structure | Factor rate (fixed fee) | Interest rate (APR) | Interest rate (APR) |
| Repayment | Daily from revenue | Fixed monthly payment | Draw-and-repay revolving |
| Collateral | None (UCC lien + PG) | Often required | Often required |
| Funding speed | 24–72 hours | 1–5 days | 1–3 weeks |
| True cost | 40–350% APR equiv. | 20–45% APR | 8–35% APR |
| Min. credit score | 500–550 | 580–620 | 600–650 |
How MCA Costs Work
What is a factor rate, and how do I calculate my total repayment?
The factor rate is a decimal multiplier applied to your advance amount to get the total repayment:
Total repayment = advance amount × factor rate
| Advance | Factor Rate | Total Repayment | Total Fees |
|---|---|---|---|
| $25,000 | 1.20 | $30,000 | $5,000 |
| $50,000 | 1.25 | $62,500 | $12,500 |
| $50,000 | 1.35 | $67,500 | $17,500 |
| $100,000 | 1.40 | $140,000 | $40,000 |
Factor rates range from 1.10 (strongest applications) to 1.50 (high-risk borrowers, short history, volatile revenue). The rate is fixed the day you sign — it does not change based on how fast you repay.
What is the true APR on an MCA?
MCA fees don’t translate directly to APR because the same fee is collected much faster than a yearly loan. The effective APR depends on both the factor rate and the actual repayment pace:
| Factor Rate | Repayment Term | Approximate Effective APR |
|---|---|---|
| 1.20 | 9 months | ~55% |
| 1.25 | 6 months | ~130% |
| 1.30 | 6 months | ~158% |
| 1.35 | 4 months | ~270% |
| 1.45 | 4 months | ~350% |
Faster repayment means higher APR — because you pay the same total fee in less time. This is counterintuitive and catches many borrowers off guard. These are true amortized APRs (the IRR on daily payments against a shrinking balance), which run roughly 2–3× the “simple” annualized figure some brokers quote — see Factor Rate vs. APR for both calculation methods.
Does paying off an MCA early save money?
Generally no. The factor rate sets the total repayment regardless of speed. If your holdback collects faster than expected (because your revenue increased), you repay the same $65,000 on a 1.30 advance — just sooner. Some MCA agreements include a “minimum purchase price” clause that sets a floor (e.g., you must pay at least 80% of the total even if you close the business). Always check for this before signing.
Are there fees on top of the factor rate?
Some providers add origination fees (1–4% of the advance amount), administrative fees, or wire transfer fees. These increase the effective cost beyond what the factor rate suggests. Ask for the full cost disclosure before signing — in California, New York, Florida, Virginia, and Utah, providers are legally required to disclose an APR-equivalent under commercial financing disclosure laws.
Qualification and Approval
What do I need to qualify?
Most MCA providers require:
- 6+ months in business (some require 1–2 years for better rates)
- $10,000–$15,000/month in gross revenue (minimum varies by provider)
- 500–550 personal FICO score (minimum; higher scores get lower factor rates)
- 3–6 months of business bank statements
- A voided check or bank verification
- No open bankruptcies
What do specific providers require?
| Provider | Min. Revenue | Min. Credit | Min. Time in Business |
|---|---|---|---|
| Expansion Capital | $8,000/month | 500 | 6 months |
| Rapid Finance | $10,000/month | 550 | 12 months |
| Forward Financing | $10,000/month | 500 | 12 months |
| Credibly | $15,000/month | 500 | 6 months |
| Kapitus | ~$20,000/month | 625 | 2 years |
| National Funding | ~$20,000/month | 600 | 2 years |
Which types of businesses are best suited for an MCA?
MCAs work best for consumer-facing businesses with consistent daily card transactions: restaurants, retail shops, salons, auto repair shops, and hospitality businesses. The holdback mechanism draws against card sales, so you need meaningful daily card volume for it to work smoothly. B2B businesses that invoice net-30 or net-60 are a poor fit — the holdback will draw against card revenue that represents a small fraction of your actual income.
Does applying hurt my credit score?
Most providers do a hard credit pull, which typically reduces your score by 3–5 points temporarily. Some brokers pre-qualify using soft pulls. If you’re applying with multiple providers, ask whether they do soft or hard pulls before submitting your bank statements.
Repayment Mechanics
How does MCA repayment work?
Two structures are common:
-
Split/holdback: A fixed percentage (10–20%) of your daily card sales is withheld directly at the payment processor level before the money reaches your bank. Slow days = smaller payment; strong days = larger payment. The term extends or shortens based on actual sales.
-
Fixed daily ACH: A flat dollar amount is debited from your business checking account every business day, regardless of your sales that day. If you process $2,000 in sales or $0, the same $400 ACH hits your account. Your account must have sufficient funds or you face NSF fees ($25–$35 per failed pull) and potential default.
Most modern providers use fixed daily ACH. Some offer a reconciliation clause — a provision allowing you to request a reduced daily payment if your monthly revenue drops significantly. This is an important protection to ask about before signing.
What is MCA stacking, and is it allowed?
Stacking means taking a second or third MCA while still repaying an earlier one. Multiple simultaneous daily ACH withdrawals compound quickly — two $300/day ACH pulls equal $3,000/week draining from your account regardless of revenue. Most MCA contracts prohibit new advances without consent, and stacking is a common predictor of business default. If you’re considering stacking, treat it as a red flag that the current advance wasn’t sized correctly.
Risks, Default, and What You’re Signing
What happens if I can’t make payments?
MCA agreements typically define default as several consecutive failed ACH pulls, a material drop in revenue below projections, or taking on additional financing without consent. Once in default, providers can:
- Enforce the UCC-1 lien on your business assets and receivables
- Invoke the personal guarantee and pursue your personal assets
- In some states, use a confession of judgment (COJ) clause to obtain a court judgment without a lawsuit or advance notice
The personal guarantee survives LLC or corporation closure — it is a personal obligation regardless of what happens to the business entity.
What is a UCC-1 lien, and how does it affect me?
A UCC-1 filing (Uniform Commercial Code) is a public notice that the MCA provider has a claim on all or specific business assets. It appears in the Secretary of State’s records in your state. A UCC-1 lien from an MCA provider can make it harder to get a bank loan or line of credit — most banks won’t lend over an existing blanket lien. If you pay off the MCA, request a UCC-3 termination statement promptly.
What is a confession of judgment (COJ)?
A COJ clause lets the provider obtain a court judgment against you without filing a lawsuit or notifying you first. You are, in effect, pre-consenting to judgment. COJ enforcement is state-specific:
- New York: Banned for out-of-state borrowers (2019)
- Texas: Outright ban (HB 700, 2025)
- Ohio: Explicitly permitted (ORC §2323.12-2323.13 — cognovit notes)
- Most other states: Permitted with varying procedural requirements
Tax Treatment and Regulations
Is the MCA fee tax deductible?
The cost of the advance — the fee you pay above the principal (e.g., the $15,000 on a $50,000 advance at 1.30) — is generally deductible as a business expense in the year it is incurred or paid, similar to interest on a business loan. The advance itself (the $50,000 principal) is not income and not deductible. Consult a CPA about your specific accounting method (cash vs. accrual), as timing of deductibility differs.
Is the MCA industry regulated?
Loosely. MCAs are not loans, so they fall outside most lending regulations. However, several states have enacted commercial financing disclosure laws requiring APR-equivalent disclosure:
- California: SB 1235 (effective 2022)
- New York: Effective 2023
- Florida, Virginia, Utah: Disclosure laws effective 2023–2024
- Georgia, Connecticut, Kansas: Disclosure laws pending or recently passed
The FTC also has authority over deceptive practices. There is no federal usury cap on MCAs.
When Not to Use an MCA
If I qualify for a bank loan, should I consider an MCA?
No. A $50,000 SBA 7(a) loan at 11% APR costs about $5,500 in first-year interest. The same advance at a 1.25 factor rate costs $12,500 — more than twice as much. A business line of credit at 20% APR for the same amount drawn for 6 months costs about $3,000. The only situation where an MCA beats cheaper alternatives is genuine speed urgency: money needed in 24–48 hours with no cheaper option available in that window.
What alternatives should I try before an MCA?
In order of cost (cheapest first):
- SBA 7(a) loan — 9.75–13.25% APR, 45–90 days, 680+ credit, 2+ years in business
- Business line of credit — 8–35% APR, 1–3 weeks, 600+ credit
- Equipment financing — 6–25% APR, 3–7 days, 620+ credit (secured by equipment)
- Online term loan — 20–45% APR, 1–5 days, 580+ credit
- Invoice factoring — 1–5%/month, 1–3 days, no credit minimum (B2B only)
- Revenue-based financing — 1.2–3× cap, 3–7 days, 550+ credit
Use the MCA cost calculator to compare dollar costs across these options for your specific advance amount and repayment timeline.
Comparing Offers
How do I compare two MCA offers?
The only number that matters is total repayment, not the factor rate headline. Two offers with the same factor rate can differ significantly on total cost if one includes additional fees. Build this table for each offer:
| Item | Offer A | Offer B |
|---|---|---|
| Advance amount | $X | $X |
| Factor rate | 1.XX | 1.XX |
| Total repayment (advance × rate) | $Y | $Y |
| Origination fee | $0 | $1,500 |
| True total cost | $Y | $Y + $1,500 |
| Daily ACH amount | $Z | $Z |
| Reconciliation clause? | Yes | No |
| COJ clause? | No | Yes |
Compare MCA providers side by side — or use our calculator to run the math for your situation.
Related Resources
- How Merchant Cash Advances Work — Full mechanics: factor rates, holdback, APR math, and repayment examples
- Factor Rate vs. APR: The True Cost — Both APR methods, worked examples, and why faster repayment costs more
- MCA vs. Alternative Funding: Cost Comparison — Exact dollar comparison across 4 business scenarios
- Personal Guarantee on an MCA: What You’re Actually Signing — Joint-and-several liability, spouse risk, state homestead protections
- MCA Red Flags to Watch For — How to identify predatory practices before you sign
- How to Get Out of a Bad MCA Deal — 6 exit options when an advance is hurting your business