What is a merchant cash advance?

Without time-consuming credit checks and rigid repayment plans, merchant cash advance is perfectly suited to the fast-paced, unpredictable world of retail. Similar to a business loan, but with several important differences, a merchant cash advance may suit any company that receives the majority of its payments by card.

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What is a merchant cash advance?

A merchant cash advance is a type of business financing for companies that have a large amount of credit card sales. Your business gets quick access to revenue from sales and then repays it plus a fixed charged based on a percentage of your sales. Merchant cash advances can be set up as daily or weekly financing.

Merchant cash advances are designed to provide a temporary cashflow solution to business owners who might not be able to qualify for other types of financing. It's typically fast, but it can one of the more expensive business financing options out there.

Compare 3 merchant cash advance companies

Thinking of getting a merchant cash advance? Let's take a look at how these three lenders work.

Fora Financial

Fora Financial is a direct lender that provides short-term business loans and merchant cash advances. Your business can apply with a quick online application. While more expensive than other types of business financing, Fora Financial's typical factor rates are relatively low. However, it's turnaround time of up to 72 hours is slightly longer than what you might find elsewhere.

Lendr

Lendr is another direct lender that specializes in merchant cash advances. The total loan cost, comes out to around , including the factor fee. You don’t need to have good credit to qualify — or even fair credit for that matter. But your business must be around for at least one year. In addition to merchant cash advances, Lendr also offers working capital loans, equipment loans and more.

Rapid Advance

RapidAdvance is another online direct lender that specializes in short-term business financing, including merchant cash advances. Businesses can typically qualify for between 85% and 250% of their monthly credit card sales and all credit types are accepted. However, RapidAdvance isn’t forthcoming about its rates as some other lenders, so you need to request a quote before you can compare it with other lenders.

How does a merchant cash advance work?

A merchant cash advance works a lot like a short-term business loan. You apply for a one-time sum, typically based on your monthly credit card sales. Your business then pays this back plus a fee that your lender determines by something called a factor rate or factor fee.

Instead of making fixed installment payments, your business then pays off the loan with a percentage of each credit card transaction, sometimes called the holdback. Holdbacks typically range from 10% to 20% of each sale. So how long it takes to pay back your loan is determined by your holdback rate and your sales — not a set loan term.

Some companies also have a minimum monthly payment that your business must make even if it doesn’t have any sales. Many have a maximum amount of time your business can take to repay a merchant cash advance, typically around one year.

Factor rates explained

A factor rate is a number above 1 that your lender uses to come up with your total loan cost. It does this by multiplying your factor rate by your loan amount. They typically range from 1.1 to 1.5, though some lender charge factor rates of 3 or even higher.

Let’s take a look at an example. Say your business qualifies for a $10,000 merchant cash advance from a lender at a factor rate of 1.15. Here’s how it breaks down:

• How much your business receives: $10,000
• How much your business owes: $11,500

Is my business eligible for a merchant cash advance?

Merchant cash advances are ideal for retailers and e-commerce businesses. But any business with a high volume of credit card sales might be able to qualify.

This can even mean young businesses and owners with poor credit. Some merchant cash advance companies are even willing to work with businesses that have been around for as little as three months. However, you can't use a merchant cash advance to fund your startup — qualification typically depends on your business's credit card sales record.

What are the benefits of a merchant cash advance?

• It's quick and efficient. Unlike business loans that can take months to be approved, a merchant cash advance can provide you with much-needed funds in a couple of weeks or less.
• Collateral isn't required.You don't need to provide any business or personal assets to be approved in order to qualify for a merchant cash advance.
• There's no credit check. While this isn't guaranteed, advances for smaller amounts can regularly be obtained with a less-than-perfect credit score.
• Repayments are based on sales. The amount you repay changes according to your earnings. This ensures small companies with changing levels of income don't get caught out with fixed repayments.

Are there any drawbacks?

• It's expensive. With terms typically hovering around one year, even the least expensive merchant cash advances can cost the equivalent of a triple-digit APR — high compared to other types of business financing.
• You can't save by prepaying. The factor rate applies no matter how long your business takes to pay back the advance, meaning that paying early won't save you anything.
• There's a lack of regulation. Merchant cash advances aren't regulated by federal banking laws, so regulations vary by state.
• It's not a long-term solution. Merchant cash advance plans usually last no longer than 12 months. Along with the cost, this means they are unlikely to provide positive results other than for a short period.
• It can be risky. While past sales information should be an accurate indicator of future sales, industries such as retail and hospitality can be fickle. If your business can no longer pay off the advance, you will need to find the repayment money elsewhere.

Compare more business loans from top lenders

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Name	Product	Filter Values	Loan amount	APR	Requirements
Fora Financial business loans			$5,000 – $500,000	Varies	6+ months in business, $12,000+ monthly revenue, no open bankruptcies	Get qualified for funding in minutes for up to $500,000 without affecting your credit score. Great for SBA loan applicants.	Go to site	Compare	loading Fetching your data…
ROK Financial business loans			$10,000 – $5,000,000	Starting at 6%	Eligibility criteria 3+ months in business, $15,000+ in monthly gross sales or $180,000+ in annual sales	A connection service for all types of businesses — even startups.	Go to site	Compare	loading Fetching your data…
OnDeck small business loans Finder Rating: 4.7 / 5: ★★★★★			$5,000 – $250,000	As low as 11.89%	600+ personal credit score, 1 year in business, $100,000+ annual revenue	A leading online business lender offering flexible financing at competitive fixed rates.	Go to site	Compare	loading Fetching your data…
Lendio business loans Finder Rating: 4.75 / 5: ★★★★★			$500 – $5,000,000	Starting at 6%	Operate business in US or Canada, have a business bank account, 560+ personal credit score	Submit one simple application to potentially get offers from a network of over 300 legit business lenders.	Go to site	Compare	loading Fetching your data…
Rapid Finance small business loans Finder Rating: 3.74 / 5: ★★★★★			$5,000 – $1,000,000	Fee based	Steady flow of credit card sales, bad credit OK	Go to site	Compare	loading Fetching your data…
First Down Funding business loans			$5,000 – $300,000	Fee Based	At least 2 years in business, an annual revenue of $300,000+, and a minimum credit score of 400	Alternative financing up to $300K with highly competitive rates.	Go to site	Compare	loading Fetching your data…
Fundbox business loans Finder Rating: 4.76 / 5: ★★★★★			$1,000 – $150,000	4.99%	You must have an established business.	Get flat rate, short-term financing based on the financial health of your business, not your credit score.	Go to site	Compare	loading Fetching your data…
Kickpay e-commerce business loans Finder Rating: 3.7 / 5: ★★★★★			$20,000 – $1,000,000	Not applicable	At least $250,000 in the past 12 months of revenue, e-commerce business, use a 3rd party fulfillment center for storing and shipping inventory, at least one US location.	Get a loan for your e-commerce business based on your sales history.	Go to site	Compare	loading Fetching your data…

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Anything else to watch out for?

Merchant cash advances are often referred to as business payday loans — and for good reason. With no federal regulation, your lender has a lot more leeway when it comes to how much it can charge you and how it discloses its fees. Watch out for complicated contracts that are difficult to follow — your lender might be trying to hide something. If possible, take some time to review your contract and ask an expert if there's anything that isn't clear.

The lack of federal regulation also means that lenders need to meet state requirements to legally offer financing. Double-check to make sure your lender is able to lend in your area before applying for a loan.

How does the application work?

The application is often simple, meaning that it often has a faster turnaround time than other types of business financing. Lenders typically only have a monthly or annual sales requirement and accept all credit types. Some might not even run a credit check for smaller advances.

Often, you can apply online by filling out a quick application. Once your application has been approved, some lenders might ask you to open a separate bank account known as a "pass through" account. You can then use this for processing any transactions and the lender can collect their share. Others might simply ask for access to your business's bank or Paypal account to withdraw the repayments.

Merchant cash advance alternatives

Don't think a merchant cash advance is right for your business? Consider these alternatives instead.

• Cash flow loans. A cash flow loan, also often referred to as an ACH loan or revenue-based financing, works like a merchant cash advance but is based on your business's daily bank deposits rather than credit card sales.
• Asset-based financing. Can't qualify for an unsecured business loan? Backing your loan with your business and personal assets can help you get access to more funding, typically 80% or 90% of your assets's value.
• Alternative business loans. Some lenders offer alternative short-term financing options that work a lot like a merchant cash advance. But daily repayments are fixed instead of a percentage of your deposits or credit card sales.
• Invoice factoring. Need a cashflow fix but work with other businesses or government agencies? Get an advance on your unpaid invoices by selling them to a factoring company at a discount. There are several different types of invoice factoring.
• Invoice financing.Use your business's unpaid invoices to back short-term business loan and repay it as your customers pay you.
• Short-term business loans. If your business needs money up front and doesn't rely on customer sales, many alternative lenders offer short-term loans that work a lot like merchant cash advances but come with repayments in fixed installments.

Bottom line

Merchant cash advances might be an easy way to get cash when your business is facing a seasonal dip in sales. It's also one of the few options that doesn't require a credit check. But the high cost and lack of regulation might make you want to consider other options first. You can get started by checking out our business loans guide.

Frequently asked questions about merchant cash advances