Merchant Cash Advance

An MCA provider advances a lump sum (for example, $50,000) to the merchant and agrees a total repayment amount (for example, $65,000) representing the advance plus a factor fee (in this case a factor rate of 1.3). The provider then automatically collects a holdback percentage (typically 10% to 20%) of the merchant's daily card sales until the total repayment amount has been collected.

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Collection is typically structured in one of two ways. In split withholding, the acquirer or payment processor splits each day's card settlement, routing the holdback percentage directly to the MCA provider before depositing the remainder to the merchant's account. In ACH remittance, the merchant's full settlement lands in their account and a fixed ACH debit is taken daily, typically calibrated to approximate the target holdback percentage based on historical sales.

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Because repayment varies with revenue, the effective annualised cost of an MCA is not fixed and depends on how quickly card sales allow the advance to be repaid. A factor fee of 1.3 on a 6-month repayment implies a simplified nominal APR of approximately 60%, though the effective APR is materially higher because the advance amortises as daily card sales reduce the balance. The same factor fee on a 3-month repayment implies an APR exceeding 100%. MCAs typically do not disclose APRs because they are structured as commercial transactions rather than loans in most jurisdictions, though regulatory scrutiny is increasing.

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Eligibility is based primarily on card processing history rather than traditional credit metrics: providers typically require 3 to 12 months of card processing statements, minimum monthly card volume, and time in business. Personal credit scores are often considered but are less decisive than processing history.

MCAs provide fast access to capital for merchants who may not qualify for traditional bank loans or who need funds quickly, with applications approved and funded in 24 to 72 hours. For businesses with seasonal cash flow, the variable repayment structure is a genuine advantage: during slow periods, repayments slow proportionally, reducing the risk of defaulting on fixed-payment obligations.

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The primary disadvantage of MCAs is cost. Factor rates of 1.2 to 1.5 are common, implying APRs of 40% to 150% or more depending on repayment speed. Stacking multiple MCAs (taking a new advance before the previous one is repaid) compounds costs further and has led to regulatory concern in several markets.

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For payment platforms with access to merchant transaction data, MCA origination is an embedded finance opportunity: the platform has better information about the merchant's revenue history than any external lender, enabling more accurate underwriting and lower fraud risk. Several payment platforms (Shopify Capital, PayPal Working Capital, Square Capital) offer MCA products as part of their embedded finance strategy.