Merchant Cash Advance (MCA) is business funding in which a provider pays a lump sum upfront in exchange for a fixed share of the business's future card sales or daily revenue until an agreed total is repaid. It is usually structured as a purchase of future receivables rather than a loan, which in many US states keeps it outside usury caps and lender licensing, and is priced with a factor rate instead of interest. Repayment comes through a holdback taken by split funding at the acquirer or by bank debits, so repayments fall when sales fall. Because principal is repaid throughout, the annualised cost far exceeds the headline factor. States such as New York regulate MCAs through standardised cost disclosure.
How does a merchant cash advance work
The provider reviews several months of card processing and bank statements and offers an advance sized to monthly sales. Repayment comes through a holdback: a fixed percentage of each day's card settlements goes to the provider, either because the acquirer splits settlement directly (split funding) or through daily or weekly debits from the merchant's bank account. When sales fall, repayments fall too, which is the main feature separating an MCA from a fixed-instalment loan.
Processors and payment facilitators offer MCAs to their own merchants because they already see sales data and control settlement, which lowers both default risk and collection cost.
Merchant cash advance factor rate and real cost
Illustrative example: a restaurant with $80,000 of monthly card sales takes a $100,000 advance at a factor rate of 1.30, so it owes $130,000. With a 20% holdback, it repays about $16,000 a month and clears the balance in just over eight months. The $30,000 cost looks like 30%, but because principal is repaid throughout, the average amount outstanding is only about $50,000, so the annualised cost is close to 90%. If sales grow and the advance is repaid in six months, the same $30,000 works out at more than 100% a year.
How is a merchant cash advance regulated
Because MCAs are generally not treated as loans, US states have regulated them through disclosure rather than rate caps. New York's commercial finance disclosure regulation took effect on 1 February 2023, with compliance required from 1 August 2023, and covers sales-based financing such as MCAs in transactions of $2.5 million or less. Providers must give standardised cost disclosures before the merchant signs, and other states have adopted similar disclosure laws. In the UK, finance provided to limited companies sits outside the consumer credit regime, so MCA providers there do not need consumer credit permissions for that business.
MCA vs revenue-based financing
Revenue-based financing uses the same repayment-as-a-share-of-revenue mechanism but is mostly sold to SaaS and e-commerce firms, measured on total revenue rather than card sales, and usually priced at lower multiples over longer terms. Invoice financing instead advances against specific unpaid invoices and is repaid when each customer pays.
What it means for buying an MCA provider
An acquirer looks at loss rates by cohort, the share of the book collected through split funding versus bank debits (split funding is harder for a struggling merchant to stop), the cost and covenants of funding lines, and compliance with state disclosure laws. Missing disclosures expose the whole book to regulatory action, so buyers usually test a sample of signed contracts against each state's required format.