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What is a Merchant Cash Advance?

A merchant cash advance is an agreement to purchase a percentage of your business’s future credit card sale in exchange for a lump sum of money. While it can serve a similar function as a loan (cash in the short term to be paid back at a higher rate in the long term), it is not technically a loan and differs from loans in a few important ways.

Unlike a loan, which demands payments of a consistent amount, a cash advance is based on a percentage of credit card sales. Because of this, payments on merchant cash advances are smaller during times in which sales are lower.

As repaying a merchant cash advance is an automatic process, lenders tend to be less concerned with the borrower’s credit history than traditional loans. Instead, your risk assessment is based mostly off of your daily credit receipts.

A consequence of the added flexibility of merchant cash advances is that the repayment rates tend to be significantly higher.

Rates (%)

Repayment for merchant cash advances differs from traditional loans. Traditional loans tend to have fixed monthly payments which pay off the interest and a portion of the principal, whereas merchant cash advances take a percentage of the businesses daily or weekly credit card sales. Since the amount repaid fluctuates with the sales of your business the rates of a merchant loan tends to be much higher. Merchant cash advances have among the highest costs in the financing world.

There are two important numbers to keep in mind when it comes to the repayment of a merchant cash advance: the holdback rate and the repayment rate. The holdback rate is the percentage of your daily credit receipts that the lender takes. This number tends to range from 10%-20% although it can vary depending on the level of perceived risk. The repayment rate is the total amount your business will have to repay the loan. It is usually expressed as a factor (ex. 1.25= the original value of the loan plus 25%). For example, if you borrow $40 000 at a factor of 1.3 than you owe the lender $53 000. The repayment rate of a merchant cash advance tends to range between 1.15 and 1.5, again this is dependant on risk assessment.

If you know your hold back rate, your repayment amount and your average daily credit receipts, then you should be able to calculate how long, approximately, it will take you to repay your merchant cash advance.

Credit Requirements

Credit requirements are typically more lenient for merchant cash advances than they are for traditional loans. Most lenders prefer to lend only to businesses with a FICO rating of above 600. However, some lenders have no credit requirements whatsoever. The more lenient the requirements, the higher the repayment rate.

In addition to your credit requirements, most lenders will also want to see that you have a steady history of a certain amount of monthly credit card transactions. Typically at least $2500 to $5000.

For Bad Credit

Bad credit can have a severely detrimental effect on your business’s ability to acquire capital. While many merchant loans require good credit, there are many which emphasize your business’s revenue and monthly credit card transactions. Cash advances with lower credit requirements tend to have higher holdback and repayment rates, but they may be the best option for those with poor credit ratings who need some working capital. A merchant cash advance can be a tool to improve your credit rating, by helping you to make payments you might have otherwise missed.

No Credit Check

A business with poor credit may want a merchant cash advance, a financing option which does not require a credit check, for several reasons. There are new businesses which don’t have enough credit history to get a conventional loan. There are businesses which have failed to make payments in the past and therefore have a poor credit rating. There are also businesses which could qualify for traditional loans but need cash without delay (some lenders can complete merchant cash advances without a credit check in as little as three days).

However, the rates are typically much higher for cash advances which do not ask for credit checks. They should be used only in circumstances in which other loans are not an option, and even then they should be approached with caution.


There is almost no government regulation of merchant cash advances. The lack of oversight stems from the fact that merchant cash advances are not technically loans. When you get a merchant cash advance, you are selling your future credit card sales at a discount. This makes merchant cash advances technically a purchase and not a loan, so merchant cash advance companies are not subject to the same federal regulations that other lenders are.

There is a call for regulation of merchant cash advances, but because of this legal loophole, it seems unlikely that the change will come anytime soon. As it stands, it is worthwhile to be cautious when dealing with merchant cash advances as there are many predatory lenders.

For Startups

Most traditional bank loans require a significant amount of business and personal credit history; many require at least two years. The need to establish credit history makes it difficult for new businesses to gain the capital they need to expand. Merchant cash advances are higher cost than traditional loans, but in the right circumstances, a cash advance may be beneficial to growing a young business. For example, a cash advance can be used to purchase equipment or pay for new software, which in turn helps to increase the new business’ profits.