How a merchant cash advance works
The funder advances a lump sum, say $50,000, and in exchange purchases a fixed amount of your future receivables, say $65,000. Repayment is a daily or weekly remittance: either a fixed ACH debit from the business bank account, or a percentage of card sales taken at the processor, called a holdback, usually 10 to 20 percent of each day’s card receipts. With a holdback, slow days remit less and busy days more, so the term stretches or shortens with sales; with a fixed debit, the payment is the same every business day.
Because the funder is buying receipts rather than lending, there is no interest rate, no amortisation and no term in the legal sense, only an estimated payback period, typically 3 to 18 months. The contract usually includes a personal guarantee against fraud or diversion of receipts and a UCC lien on business assets, and most first-position contracts prohibit taking a second advance while the first is open.
What a merchant cash advance costs
Cost is set by the factor rate multiplied by the advance, plus fees. Published factor rates run from about 1.15 for strong card-heavy businesses to 1.49 for weaker files or very short terms. Origination fees of 1 to 5 percent are deducted from the deposit. Because the payback is fixed and the term short, the annualised cost is far above what the factor suggests. The table shows the same $50,000 advance across terms.
| Estimated term | Total payback | Cost | Daily remittance (approx.) | Approximate APR |
|---|---|---|---|---|
| 4 months | $65,000 | $15,000 | $774 | 180%+ |
| 6 months | $65,000 | $15,000 | $516 | 120% |
| 9 months | $65,000 | $15,000 | $344 | 80% |
| 12 months | $65,000 | $15,000 | $258 | 60% |
Paying early does not reduce the payback unless the contract includes a prepayment discount, which some funders offer for settlement within the first 30 to 90 days. Ask for it in writing.
Who qualifies and for how much
Typical minimums are six months in business, about $10,000 a month in deposits, a business bank account, and personal credit from around 500. What decides the amount and the factor is the statement quality: consistent daily deposits, a healthy average balance, few negative-balance days, no more than one or two NSFs in ninety days, and no undisclosed advances. Card-heavy businesses such as restaurants, retail, salons and auto shops qualify most easily because the funder can collect at the processor.
Amounts are sized to deposits, usually 50 to 150 percent of one month of revenue. A business depositing $40,000 a month typically sees offers of $20,000 to $60,000. Stacking a second advance on top of the first reduces the amount, raises the factor and usually breaches the first contract; consolidation into a single position is the better path.
| Product | Typical amount | Time to fund | Cost (market range) | Minimums |
|---|---|---|---|---|
| Merchant cash advance | $5,000 – $500,000 | Same day to 2 business days | Factor rate 1.15 – 1.49 (paid as a fixed amount, not interest) | 6 months in business; 500+ (revenue matters more than score) |
| Working capital loan | $5,000 – $250,000 | 1 – 2 business days | APR roughly 15% – 60%; short-term products may quote a factor rate instead | 6 months in business; 550+ typical |
| Revenue-based financing | $25,000 – $2,000,000 | 2 – 7 business days | Repayment cap of 1.1x – 1.5x the advance | 6 – 12 months in business; Revenue-driven; 550+ typical |
| Business line of credit | $10,000 – $250,000 | 1 – 3 business days to open; draws often same day | APR roughly 10% – 60%; some lenders price as a weekly fee on the drawn balance | 6 – 12 months in business; 600+ typical |
| Business term loan | $10,000 – $500,000 | 1 – 3 business days (online lenders) | APR roughly 8% – 45% depending on credit, revenue and term | 1 – 2 years in business; 600+ typical; 640+ for better pricing |
When an advance is the right tool, and when it is not
It fits a short, specific, revenue-producing need where speed matters: a broken walk-in cooler, an inventory deal that expires this week, payroll before a large receivable lands. If the money earns more than its cost within the term, the advance is rational. It does not fit build-outs, acquisitions, real estate, refinancing other advances, or a structural shortfall, where the daily remittance drains the cash the business needs and the cost compounds.
If the file supports a term loan or a line of credit, those cost a fraction and repay monthly or weekly. Many owners take an advance for an emergency and refinance it into a term loan after six months of clean statements, which is the sensible sequence. The factor-rate guide on this site shows the full arithmetic for comparing an advance with a loan.
Read the contract
What to check before signing an advance
- Amount deposited after fees
- Total payback and the implied factor
- Fixed daily debit or percentage holdback, and the reconciliation clause
- Estimated term and what happens if sales fall
- Prepayment discount, if any, in writing
- Personal guarantee scope and UCC lien
- No confession of judgment
- Who the funder is and where disputes are heard
Regulation and disclosure
Merchant cash advances are commercial transactions and sit outside consumer lending law. Several states now require providers to disclose the total cost, an annualised rate and the payment schedule before signing: California (SB 1235, financing up to $500,000), New York (CFDL, up to $2.5 million), and others including Utah, Virginia, Georgia, Florida, Connecticut and Kansas. Coverage follows the location of your business. Confessions of judgment in these contracts are banned or restricted in several states. The disclosure-laws guide on this site has the detail.