What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is a type of financing that can provide a lifeline for businesses in need of quick cash access. Its speedy approval process isn’t overly dependent on your credit score, which makes it appealing. However, it comes with a hefty price tag and its repayment scheme doesn’t make it suitable for every venture.

In this article, we’ll cover what exactly merchant cash advances are, how they work, and how you can calculate them. We’ll also provide pros and cons of opting for this type of financing, along with some alternatives for you to consider should it not suit your business’ needs.

What Is a Merchant Cash Advance?

A merchant cash advance is a business financing arrangement in which a lender offers you an upfront sum of cash, which you then repay through a percentage of your future card sales, plus fees. Despite giving you access to money that you’ll have to pay back, MCAs aren’t loans. Rather, they’re a way for lenders to buy your future sales.

How Does a Merchant Cash Advance Work?

Merchant cash advances work by providing you with a lump sum of capital, and then making daily – or weekly – deductions of your card sales until you repay the amount plus the associated fees. Its approval process is much faster than most funding processes’, allowing you to access cash within one to three working days.

Because you’ll depend on future card transactions to repay your advance amount, lenders will assess your card transaction history to decide how much they’ll offer you, how much you’ll have to pay them back, and how big your deductions will be. In the UK, MCA lenders usually offer between £2,500 and £300,000 as advance amounts and deduct between 10% and 25% of every card sale until you repay your debt.

Overall, your repayment amount will consist of your advance amount plus the lender’s fees. The main one is charged as a factor rate. Unlike regular interest rates, factor rates are expressed in decimals – not percentages – and usually range between 1.1 and 1.5, varying according to the lender’s assessment of your business. The more confident the lender is about you repaying them fully and promptly, the lower the factor rate is. Besides that, you could also pay administrative fees or underwriting fees.

How to Calculate Merchant Cash Advances

To calculate merchant cash advances, as well as their cost, you’ll need to find your basic repayment amount by multiplying the advance amount by the factor rate.

For example, in a scenario where you’re requesting £100,000 as an advance amount and are given a factor rate of 1.2, your cost will be £20,000 and your basic repayment amount will be £120,000.

Bear in mind that providers charge different fees and use different criteria to calculate factor rates. This, along with other factors, make it impossible to determine an average cost to all merchant cash advances. For you to get the best deal, you should ask for a MCA quote and compare it to other financing options.

How to Convert Factor Rates into APRs

Here’s a quick 4-step guide on how to convert factor rates into annual percentage rates (APRs). This is the best way to compare a MCA with other forms of financing available to you, since most business loans use APRs as their interest rate.

To illustrate this process, along with the steps, we’ve included calculations that use the scenario of a £100,000 advance with a 1.2 factor rate as an example.

Step 1: Calculate the repayment amount by multiplying the advance amount by the factor rate

£100,000 x 1.2 = £120,000

Step 2: Calculate the financing cost by subtracting the advance amount from the repayment amount

£120,000 – £100,000 = £20,000

Step 3: Calculate the percentage cost by dividing the financing cost by advance amount

£20,000/£100,000 = 0.2.

Step 4: Calculate the APR by multiplying the percentage cost by 365 and dividing the result by the expected repayment period (in days)

0.2 x 365 = 73

73/274 = 0.266 or 26.6%


It’s worth noting that this calculation doesn’t include any additional fees, as they’re very personalised. When comparing your merchant cash advance offer to your other financing options, include any additional fees in the calculation done in step 1 and then proceed to the following steps.

The Pros and Cons of Merchant Cash Advances

graphic with pros and cons of merchant cash advances

Merchant cash advances have their share of benefits but they’re not suitable for every business. Let’s take a look at some of their pros and cons.

Pro: Fast approval

While a regular business loan can take anywhere from two weeks to a couple of months, merchant cash advances can be approved within one to three working days. This is incredibly valuable if you need to access funds as soon as possible.

Pro: Flexible repayment period

As a short-term financing option, merchant cash advances are usually expected to be paid within three to 36 months. That said, their repayment periods aren’t set, which gives you extra freedom as to how long you can take to pay your debt.

Pro: Few requirements

Merchant cash advances don’t require a high credit score, stipulate a particular use for the money, or request a collateral to be put up. This means it’s way more accessible to new ventures and businesses with bad credit.

Con: Expensive

Merchant cash advances are quite expensive compared to other financing options. While business loans offered by traditional banks usually offer APRs between 2% and 13%, this rate can reach 200% in MCAs.

Con: Can hurt cash flow

Merchant cash advances are paid through constant deductions of sales percentages, which can hurt your cash flow. If not managed properly, they cause you to require another advance to keep afloat and trap you in a debt cycle.


To know if your cash flow could withstand the financial impact of a MCA, we recommend checking how much of your average payment would still make it to your bank account discounting the MCA fees and your merchant account fees.

Con: Not regulated

Merchant cash advances are not regulated by the Financial Conduct Authority (FCA). This means that you have to be extra cautious when signing up for one, as some lenders can use misleading marketing techniques to lure you into bad deals.

Which Merchant Cash Alternatives Are There?

Merchant cash advances aren’t the only financing option out there and there are others you should consider before choosing one for your business. We’ll present a couple of examples below.

Business cash advances

Business cash advances work similarly to merchant cash advances. However, instead of taking small percentages of your payments, a business cash advance is repaid through fixed payments, usually daily or weekly. Because they don’t depend on your sales volume, their fees tend to be lower than the ones offered by MCAs.

Online business loans

Online business loans are a simplified version of the standard business loans offered by traditional banks. Usually offered by financial technology companies, they come in short-term and long-term options and have flexible requirements, but they cost more than the standard business loans.

Invoice factoring

Invoice factoring involves you accessing advance cash by selling your outstanding invoices – rather than your future sales – at a discount. The best invoice factoring services are the ones that offer you the fastest access while charging the lowest fees. However, this option does require your business to be regularly paid by invoices.


Merchant cash advances are a quick, streamlined way of accessing extra funds. On the bright side, they offer payment flexibility and have less requirements. However, because of their high cost, you should consider if your business has enough financial health to repay them before committing.

If you’re setting your business up and planning to apply for a merchant cash advance later down the line, we recommend thinking about other aspects of your venture that can affect this course of action.

For instance, choosing a payment system with low fees can be crucial in this scenario. That’s because the lower fees you pay to the system, the more of a budget you have to pay for the merchant cash advance fees without compromising your cash flow.

Written by:
Lucas Pistilli author headshot photo
Lucas is a Brazilian-born journalist and Expert Market’s go-to writer for all things EPOS systems, merchant accounts, and franking machines. Having covered business, politics and technology for many years, he’s driven by his passion for the written word and his goal to help people make well-informed decisions.