Question 1

What is a merchant cash advance (MCA)?

Accepted Answer

A Merchant Cash Advance (MCA) is a type of business financing where a company receives a lump sum of cash upfront in exchange for a percentage of future credit card sales or daily bank deposits. Unlike traditional loans, MCAs are repaid through automatic daily or weekly deductions (called holdbacks) from your business revenue. MCAs use a factor rate instead of an interest rate, and repayment speed depends on your sales volume.

Question 2

How do you calculate MCA costs?

Accepted Answer

To calculate MCA costs: 1) Multiply your advance amount by the factor rate to get total payback (e.g., $50,000 × 1.25 = $62,500). 2) Subtract the advance from payback to get total cost ($62,500 - $50,000 = $12,500). 3) Calculate daily payment by multiplying daily sales by holdback percentage. 4) Estimate repayment period by dividing total payback by monthly holdback amount. The total cost is fixed regardless of how quickly you repay.

Question 3

What is a factor rate in merchant cash advance?

Accepted Answer

A factor rate is the multiplier used to determine your total MCA repayment amount. Factor rates typically range from 1.1 to 1.5 (or 10% to 50% of the advance amount). For example, a $50,000 advance with a 1.25 factor rate means you'll repay $62,500 total. Unlike APR, the factor rate doesn't change based on repayment time—you pay the same total whether you repay in 3 months or 12 months. This makes MCAs expensive if repaid quickly.

Question 4

How much does a merchant cash advance cost?

Accepted Answer

MCA costs vary widely based on the factor rate and repayment period. A typical $50,000 advance at 1.25 factor costs $12,500 in fees. If repaid in 6 months, this equals approximately 50% APR. If repaid in 3 months, the effective APR can exceed 100%. Total costs range from 10% to 50% of the advance amount, making MCAs one of the most expensive forms of business financing. Always calculate the effective APR to compare with traditional loans.

Question 5

What is holdback percentage in MCA?

Accepted Answer

Holdback percentage is the portion of your daily credit card sales or bank deposits automatically deducted to repay the MCA. Typical holdback rates range from 10% to 30%. For example, with a 15% holdback and $3,000 in daily sales, $450 goes to MCA repayment daily. Higher holdback percentages mean faster repayment but reduce your working capital. The holdback continues every business day until the full payback amount is collected.

Question 6

What is the effective APR of a merchant cash advance?

Accepted Answer

The effective APR of an MCA can range from 40% to over 200%, depending on the factor rate and repayment speed. To calculate: ((Payback - Advance) / Advance) × (365 / Days to Repay) × 100. A $50,000 advance at 1.25 factor repaid in 6 months has an effective APR of about 50%. Repaid in 3 months, it exceeds 100% APR. MCAs don't advertise APR because they technically aren't loans, but calculating it reveals their true cost.

Question 7

Is a merchant cash advance better than a business loan?

Accepted Answer

MCAs are rarely better than traditional business loans from a cost perspective. Choose an MCA only if: 1) You can't qualify for traditional financing, 2) You need funds within 24-48 hours, 3) You have strong credit card sales to support high holdbacks, 4) You can repay quickly. Traditional business loans (8-20% APR), SBA loans (6-13% APR), and business lines of credit are almost always cheaper. MCAs should be a last resort due to their extremely high effective interest rates.

Question 8

How fast can you get a merchant cash advance?

Accepted Answer

MCAs are known for speed—most can be approved and funded within 24-72 hours. The application process is minimal, often requiring just a few months of bank statements or credit card processing statements. This speed comes at a cost: MCAs are expensive. The quick approval process doesn't require extensive financial documentation or collateral, but the factor rates (and effective APRs) are significantly higher than traditional loans to compensate for increased risk and fast processing.

Question 9

Can you pay off a merchant cash advance early?

Accepted Answer

Yes, most MCAs can be paid off early, but there's usually no financial benefit. Since the total payback amount is fixed (advance × factor rate), you pay the same total cost whether you repay in 3 months or 12 months. Some MCA providers offer a small early payoff discount (typically 5-10%), but you should verify this before signing. The fixed cost structure means faster repayment results in a higher effective APR, making MCAs extremely expensive for short-term needs.

Question 10

What are the risks of merchant cash advances?

Accepted Answer

MCA risks include: 1) Extremely high effective APR (often 40-200%+), 2) Daily holdbacks reducing cash flow and working capital, 3) Revenue-based repayment—slow sales extend repayment but not cost, 4) Stacking—some businesses take multiple MCAs, creating a debt spiral, 5) Aggressive collection practices if you default, 6) Personal guarantees may put personal assets at risk. The biggest risk is the cost—MCAs can trap businesses in expensive debt cycles. Always explore traditional financing first.

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